National Insurance Contributions Increase
The first Budget of the new Labour Government included a painful, if not unexpected, increase in Employer National Insurance Contributions (NIC) from April 2025. It will affect all businesses, with some sectors with higher proportions of lower-paid staff, such as care and hospitality, being particularly hard hit.
The change will be on us before we know it, so I wanted to look at both the positives and negatives of this change and suggest ways employers can reduce or mitigate the impact of the new rates.
The Good
There may not be much positive about the increase in Employers’ NIC, but one thing is the increase in Employment Allowance.
Employment Allowance can be offset against the employer’s NIC bill, and from April 2025, this will increase from £5,000 to £10,500 per year for qualifying employers. The £100 000 is to be removed, meaning employers with more than one payroll can only apply the allowance to one payroll. Needless to say, the allowance should be applied to ensure that it is fully utilised.
The Bad
The standard rate payable by employers will increase from 13.8% to 15%. This is ‘only’ an increase of 1.2% percentage points but represents an actual increase of 8.7%.
Can anything be done to mitigate the increase?
There could be a small glimmer of hope in all this doom and gloom, with actions that could help offset some of this additional cost. However, all the following will require detailed discussions with employees and, in some cases, will require changes to the contract of employment, so please get advice.
Pension Contributions
It is a legal requirement that all employees are enrolled in an employer-funded pension scheme, although employees can opt out of the scheme. The most tax- and NIC-efficient way of funding pension contributions is through salary sacrifice. This reduces the gross pay for tax and employee NIC purposes.
The effect of the reduced gross pay is an increase in net pay. The employer also saves on Employers’ NIC, a saving which can be added to the employees’ pension fund as an employer contribution. The employer can, of course, keep the NIC savings.
A word of caution here. The sacrificed pension contribution cannot take the employee’s reduced salary below the National Minimum Wage, and there must be an effective amendment to the employee contract of employment.
Bonuses
If bonuses are payable, these can also be made as an employer contribution, thereby achieving the same tax and NI savings as regular monthly salary pension deductions.
Additional Holiday Allowance
Rather than a pay rise, some employees may prefer additional holidays (effectively a salary sacrifice). This saves the employer from paying the additional Employers’ NIC on the amount that would have been payable as salary.
Salary Sacrifice
In addition to pension contributions, salary sacrifice can be used to fund a Cycle to Work scheme, purchase of technology such as computers or purchase of an electric vehicle.
Employing Veterans NIC Relief
Employers get relief from employers NIC for 12 consecutive months from the first day of employing a service veteran.
Mobile Phone
An employer can provide an employee with a mobile phone without needing to pay tax or NIC or report to HMRC as a benefit in kind. The only stipulation is that the contract for the telephone is between the employer and the telephone supplier.
This is perhaps best provided as part of an employee’s pay package. However, given that some mobile telephone contracts can cost upwards of £60 per month for three years, the employee would need to earn about £88 a month, or £1,056 a year, to pay £60 from their net pay.
Hopefully, this has given you food for thought on mitigating some of the additional tax burden employers will face starting in April 2025.
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