The government announced a massive employer’s national insurance increase in the October 2024 Budget.
They set out three changes to employer’s National Insurance Contributions (NICs) to take effect from April 6, 2025:
- An increase in the rate of employer NICs from 13.8% to 15%
- A cut in the threshold at which employers become liable to pay NICs – down from £9,100 a year to £5,000 a year
- An increase in the Employment Allowance from £5,000 to £10,500
The net revenue expected to be raised by these changes is predicted to be just under £24 billion in 2025-26 rising to just under £26 billion in 2029-30.
According to a research briefing in the House of Commons Library, HMRC expects the changes to impact 1.2m employers:
- 940,000 employers will see their NICs increase
- 820,000 employers will see no change
- 250,000 employers will see their NICs reduce
Which are you?
How much more NI will each employee cost me?
The two changes are that NICs become payable on ALL earnings above £5,000 rather than above £9,100 AND the rate of NICs is increasing from 13.8% to 15%.
For someone on a monthly payroll, NICs at 15% will apply to earnings above £417.67 compared with 13.8% on earnings above £758.33.
If an employee earns £30,000 p.a. this means:
If an employee earns £6,000 p.a. this means:
This example for a lower-paid employee will affect industries such as hospitality in which there are many lower-paid, part-time employees.
Essentially, the employer’s national insurance increase means every employee earning over £5,000 will be more expensive for the employer from April 6, 2025.
What about the increase in the Employment Allowance?
The Employment Allowance is a rebate of employers’ NICs up to a level of £10,500 (previously £5,000) which means that IF YOUR BUSINESS IS ELIGIBLE:
- Your annual employer NIC cost is reduced by £10,500
- If your annual employer NIC cost is less than £10,500 then you pay no employer’s NIC
Check eligibility and, in particular, note that you cannot claim if your company has just one director and that director is the only employee liable for employer’s NIC.
That said, what does it look like when the Employment Allowance is factored in?
Example 1 – a company with six employees earning between £40,000 and £70,000 p.a.
This employer with an annual payroll cost of £290,000 is only paying £1k more in employer’s NICs.
Example 2 – a company with five employees earning between £15k and £50k
This employer, a bit smaller than the first example, is actually better off because the increase in the Employment Allowance is greater than the increase in employer’s NICs.
Example 3 – the single-director company with a low-salary-high-dividends remuneration policy
Because this company is not eligible to claim the Employment Allowance the employer’s national insurance increase means a higher employer’s NIC cost.
Overall, how does the employer’s national insurance increase play out?
This is a massive increase in tax and most of the burden will fall on large employers.
Every employee earning over £5,000 will be more expensive for the employer from April 6, 2025, which makes sense if £24bn is to be raised every year.
However, for many employers the increase in employer’s NICs will be modest. Even in the example above where the payroll cost is almost £300k, the employer is only paying £1k more.
Some smaller employers will be better off but single-director companies may be worse off.
Many more employers will see no change because the Employment Allowance they can claim is greater than the employer’s NIC cost they incur.
Employers facing a higher employer’s NIC cost will pay less corporation tax if their profits fall as a result and vice versa.
The cashflow effect is that the Employment Allowance will last longer into the tax year than it used to but single-director companies will start to pay the employer’s NICs earlier in the tax year than previously.
Because the increase in the rate and the lowering of the earnings threshold work in the opposite direction to the increase in the Employment Allowance, the devil is in the detail when it comes to calculating whether your business is better or worse off and by how much.
Increasing costs of employment don’t stop with the increase in employer’s NICs. In April there are also significant uplifts to the National Living Wage and National Minimum Wage which employers need to be aware of.
Small print:
- The Employment Allowance is now available to employers with an employer’s NIC cost in excess of £100,000
- Check if your organisation is eligible to claim the Employment Allowance
- The new rate of employer’s NIC also applies to benefits in kind
Much to think about and the devil really is in the detail. It all makes 2025-26 that bit more tricky to navigate even if your business will benefit from these changes.
Can we help you and your business as the year goes by?
Let’s have a free-of-charge chat about your business – call Michael Austin on 020 7125 0270 or email info@bluedotconsulting.co.uk
Michael
Related links:
National Living Wage and National Minimum Wage increase – April 2025
Business growth – the financial essentials
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