The Salary Calculator

How is Employer NI Changing and Will it Affect You?

by Madaline Dunn

April’s hotly-debated Employer National Insurance (NI) rise is fast approaching. A big ticket item in the Autumn Budget, the increase has been met with unease by some, concerned it will tighten purse strings, cut jobs and raise prices. But while change is incoming, it’s not all doom and gloom. 

If you’re wondering what this means for you, The Salary Calculator is here to clear up the confusion. This week, we’ll be answering: 

• How is Employer NI changing?
• Why are Employer NI rates increasing?
• What do the changes mean for businesses?
• How will the changes affect you?

How is Employer NI changing?

Back in October, Chancellor Rachel Reeves announced that in the new financial year Employer National Insurance — a tax employers pay on top of employee wages — will be increasing from 13.8% to 15%. 

The Autumn Budget also delivered news that the threshold at which employers pay NICs on employees’ earnings will decrease from £9,100 a year to £5,000. 

However, alongside this, Employment Allowance — which allows employers to reduce their annual National Insurance liability — will increase from £5,000 to £10,500, and the £100,000 eligibility cap will be removed, meaning more employers will qualify. 

The changes to Employment Allowance, Reeves said, will help “protect” the smallest companies. 

“This means that 865,000 employers will not pay any national insurance at all next year, and over 1 million will pay the same or less than they did previously,” the Chancellor explained.

These changes will be effective from 6 April 2025.

It hasn’t all been plain sailing, though. Peers in the House of Lords (HoL) voted to exempt care providers, charities, and small businesses from the rise, resulting in ‘ping pong’ between the two chambers. That said, the HoL amendments are “likely to be overturned” in the House of Commons (HoC), according to the Chartered Institute of Taxation (CIOT).

Why are Employer NI rates increasing?

According to Reeves, the changes to Employer NI aim to raise revenues to fund public services and “restore economic stability.”

Indeed, the Budget committed to providing an additional £22.6bn for the Department of Health and Social Care (DHSC) across the next two years and a £3.1bn increase in the capital budget.

Reeves called this a “record injection of funding” and the “largest real-terms growth in day-to-day NHS spending outside of Covid since 2010.”

The Employer NI increase, expected to raise £25bn, is part of a larger £40bn in tax rises. However, according to 2023 projections from the Centre for Progressive Policy (CPP), far more is required to keep public services afloat. The CPP estimates that the government will need to find an additional £142bn per year by 2030 “just to maintain current levels of public services.”

What do the changes mean for businesses?

The incoming changes mean some companies are facing higher costs. When assessing the effects of the government’s new policy measures, the Office for Budget Responsibility (OBR) said the NIC rise will increase employer payroll costs by just under 2%.

But it’s important to note that the bill footed by employers will vary depending on how much workers earn.

According to the Institute for Fiscal Studies (IFS), for each median earner (£33,000), employers are facing an additional £900. Meanwhile, for a full-time minimum wage worker (£22,000), the increase will look more like £770. 

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“SMEs, in particular, will bear the brunt of this additional tax burden”

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“Whilst smaller employers might not feel the impact due to the rise in the employment allowance, SMEs, in particular, will bear the brunt of this additional tax burden,” said Emily Gaffney, Freeths Taxation Senior Associate, in a statement to The Salary Calculator.

This is echoed in new findings from iwoca, revealing that 66% of SME leaders estimate the rise will “cost them each over £10,000.”

How will the changes affect you?

Although the NIC rise won’t directly affect take-home pay, some businesses will be looking to find ways to offset the increase, which, in some cases, could impact workers and consumers. 

Indeed, in October, the CIOT warned that the changes to Employers NI could have “unforeseen consequences,” including businesses seeking “alternative arrangements to taking on people as employees.”

“Alternatives could include outsourcing or offshoring services and reducing the numbers of employees,” said Eleanor Meredith, Chair of CIOT’s Employment Taxes Committee.

The Chartered Institute of Personnel and Development (CIPD) reported that this is a move that 32% of the 2,000 firms it recently surveyed plan to make, with companies reducing headcount through “redundancies or recruiting fewer workers.”

Likewise, the National Insurance Pulse Survey by Towers Watson, which spoke to over 200 respondents from various industries, found that 28% are looking to make workforce cuts, and 33% have reduced planned salary increases.

The IFS has claimed that “just £16bn” will be raised from the Employer NI increase due to this impact on wages.

Reflecting on the situation, Gemma Alicia Long, HR Consultant and Director of HR & Co, said that small businesses are having to make “difficult decisions” to mitigate the increase in NI costs and safeguard their businesses.

“For some, this may result in job losses,” said Long. 

These cascading impacts have led to some questioning whether the increase breaks the government’s pledge to “not increase taxes on working people.”

“The Labour party assured voters during the 2024 general election that there would be no tax increases on ‘working people’. From an economic perspective, there is a risk that an increase in employer national insurance, combined with the rise in the National Minimum Wage for young adults, becomes effectively that – a tax increase borne by working people,” said Gaffney. 

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“Many companies plan to pass on the additional costs to consumers due to the increased operational costs”

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In hospitality, among the industries set to feel the biggest shock, trade bodies have warned that the changes will cost £1bn by bringing 774,000 into the eligible threshold. According to UKHospitality, in January, businesses were already making decisions to cut investment and jobs, freeze recruitment, and reduce hours.

Elsewhere, a survey of 52 leading retailers by the British Retail Consortium found that 56% plan to reduce ‘number of hours/overtime’ and 46% plan to cut back on ‘stores headcount’.

That said, according to the Trades Union Congress (TUC), employers are “more likely to absorb the increased contributions than shift the burden to their staff.”

Firms are also exploring price adjustments. “Many companies plan to pass on the additional costs to consumers due to the increased operational costs,” said Long. 

Indeed, data from the Office for National Statistics revealed that in late February, 49% of businesses with 10 plus employees shared their intentions to increase prices in response to future rises in employment costs. 

With the NIC changes right around the corner, Long notes that businesses will be looking to prioritise operational efficiency.

“Businesses are exploring cost-saving measures such as outsourcing and automation to maintain profitability without compromising service quality,” she said. 

Financial planning is also key. “Small businesses are revising their budgets and financial forecasts to accommodate the higher NI contributions, ensuring they maintain healthy cash flow and profitability,” said Long. 

However, as businesses seek to reduce costs with outsourcing, it’s key that employers are mindful of ‘false self-employment,’ something the CIOT has warned against. 

“We are concerned that the increase in employers’ NI could lead to an increase in ‘false self-employment’, where businesses trying to save money turn to arrangements where the worker is not directly employed by them, without necessarily appreciating the rules and risks of such arrangements,” said the CIOT’s Eleanor Meredith in October. Such arrangements can have consequences for both employers and employees. 

Another option for employers looking to minimise impact is salary sacrifice arrangements. A government-backed scheme, these arrangements reduce entitlement to cash pay in return for a non-cash benefit, which, in turn, can help save on NICs. Salary sacrifice arrangements come in many forms, including pension contributions, bike-to-work schemes and car schemes. For more insight into other avenues employers might explore to mitigate the NI rise, head here. 

Ultimately, with no rule book instructing employers on which option to choose, the impact of the rise will play out differently from business to business. But, for workers concerned about the consequences, the TUC advises that the National Living Wage and the Employment Rights Bill will provide “important protections.”

 

Tags: Autumn budget, Employer National Insurance, national insurance