After a lot of speculation we now have the answers to what is in the chancellors autumn budget. As an employer, there’s no doubt the biggest announcement was the changes to Employer’s National Insurance (NI).

These changes are set to take effect on 6th April 2025, and they could impact your business’s payroll costs. Here, we’ll break down the current landscape, explain the upcoming changes, and illustrate how they will affect businesses of different sizes.

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Understanding the Current Landscape

Before delving into the upcoming changes, it’s essential to grasp the current structure of employers’ National Insurance.

1. Employers’ National Insurance Rate

Current Rate: Employers currently pay 13.8% on employee earnings above the secondary threshold.

2. Secondary Threshold

Current Secondary Threshold: For the tax year 2024-2025, the secondary threshold is set at £9,100 annually per employee.

What is the Secondary Threshold?

The secondary threshold is the earnings level above which employers must start paying National Insurance contributions (NICs) for their employees. Earnings up to this threshold are exempt from employer NI.

3. Employment Allowance

Current Employment Allowance: Eligible employers can reduce their annual National Insurance bill by up to £5,000.

What is the Employment Allowance?

The Employment Allowance allows businesses to offset some of their National Insurance liabilities, effectively reducing the cost of employing staff. Practically, it means you don’t pay the first £5,000 of Employer’s NI.

What’s Changing on 6th April 2025?

Starting from 6th April 2025, several adjustments to employers’ National Insurance are set to take effect:

1. Employers’ National Insurance Rate Adjustment

New Rate: The employers’ NI rate will increase to 15%.

This 1.2% rise reflects the government’s efforts to fill the ‘black hole’ in the public finances.

2. Secondary Threshold Adjustment

New Secondary Threshold: The secondary threshold will decrease to £5,000 annually per employee.

This decrease means that employers will pay NI contributions on a larger portion of employee earnings, effectively raising the NI liability for businesses with higher-earning staff.

3. Employment Allowance Adjustment

New Employment Allowance: The Employment Allowance will increase to £10,500.

This increase allows eligible employers to reduce their NI liabilities by a greater amount, providing additional financial relief despite the higher NI rate and lower secondary threshold.

Impact on Employers: Real-World Examples

To illustrate how these changes might affect businesses, let’s consider two examples:

Example 1: A Small Company

– Company Profile: 3 employees
– Total Annual Wages: £90,000

Current Scenario (Before 6th April 2025):

1. NI Calculation:
– Per Employee Earnings: £30,000
– NI on Each Employee:
– Earnings above £9,100: £30,000 – £9,100 = £20,900
– NI Contribution: 13.8% of £20,900 = £2,884.20
– Total NI for 3 Employees: £2,884.20 x 3 = £8,652.60

2. Employment Allowance:
– Reduces NI by £5,000
– Net NI Liability: £8,652.60 – £5,000 = £3,652.60

Post-Change Scenario (After 6th April 2025):

1. NI Calculation:
– Per Employee Earnings: £30,000
– NI Contribution:
– Earnings above £5,000: £30,000 – £5,000 = £25,000
– NI Contribution: 15% of £25,000 = £3,750
– Total NI for 3 Employees: £3,750 x 3 = £11,250

2. Employment Allowance:
– Increased to £10,500
– Net NI Liability: £11,250 – £10,500 = £750

Difference:

– Current Net NI Liability: £3,652.60
– Post-Change Net NI Liability: £750
– Decrease: £3,652.60 – £750 = £2,902.60

This small company will experience a decrease in NI costs of approximately £2,902.60 annually.

Despite the increase in the NI rate and decrease in the secondary threshold, the significant increase in the Employment Allowance results in a net reduction in NI liability for this company.

Example 2: A Medium-Sized Employer

– Company Profile: 15 employees
– Total Annual Wages: £330,000

Current Scenario (Before 6th April 2025):

1. NI Calculation:
– Average Earnings per Employee: £22,000
– NI on Each Employee:
– Earnings above £9,100: £22,000 – £9,100 = £12,900
– NI Contribution: 13.8% of £12,900 = £1,780.20
– Total NI for 15 Employees: £1,780.20 x 15 = £26,703

2. Employment Allowance:
– Reduces NI by £5,000
– Net NI Liability: £26,703 – £5,000 = £21,703

Post-Change Scenario (After 6th April 2025):

1. NI Calculation:
– Average Earnings per Employee: £22,000
– NI Contribution:
– Earnings above £5,000: £22,000 – £5,000 = £17,000
– NI Contribution: 15% of £17,000 = £2,550
– Total NI for 15 Employees: £2,550 x 15 = £38,250

2. Employment Allowance:
– Increased to £10,500
– Net NI Liability: £38,250 – £10,500 = £27,750

Difference:

– Current Net NI Liability: £21,703
– Post-Change Net NI Liability: £27,750
– Increase: £27,750 – £21,703 = £6,047

This medium-sized employer will face an additional NI cost of approximately £6,047 annually.

Note: In this case, the increase in the NI rate and decrease in the secondary threshold result in a higher NI liability, even with the increased Employment Allowance.

What Can Employers Do?

While these changes represent an increased financial commitment for some businesses, others may benefit from the adjustments. Here are steps businesses can take to mitigate the impact:

1. Figure out how it will affect you and your business:
– Calculate your numbers based on your current payroll.

2. Budget for Increased Costs, if necessary:
– Incorporate the anticipated NI changes into your financial planning to avoid unexpected expenses. For businesses expecting higher NI liabilities, adjusting budgets accordingly is crucial.

Conclusion

The forthcoming changes to employers’ National Insurance effective 6th April 2025 will see an increase in the NI rate to 15%, a decrease in the secondary threshold to £5,000, and an increase in the Employment Allowance to £10,500. These adjustments will have varying impacts on employers depending on their size and total wages.

Understanding these changes and proactively adjusting payroll processes, financial planning, and seeking professional advice will help ensure a smooth transition and maintain your business’s financial health.