1. Increase in Secondary Class 1 National Insurance Rate:

• Current Rate: Employers currently pay 13.8% in secondary Class 1 National Insurance contributions on employee earnings above the secondary threshold.

• New Rate: Starting 6 April 2025, this rate will rise by 1.2 percentage points, from 13.8% to 15%. This is a substantial increase that will impact the cost of hiring employees, especially those with higher salaries.

2. Reduction in Secondary Threshold:

• Current Threshold: Employers must pay National Insurance contributions on earnings above £9,100.

• New Threshold: This threshold will be reduced to £5,000 starting in 2025. This means employers will pay National Insurance contributions on a wider range of employee earnings, including those with lower wages.

3. Employment Allowance Increase:

• Current Allowance: Employers can currently claim up to £5,000 through the Employment Allowance to offset their National Insurance liability.

• New Allowance: The Employment Allowance will be increased to £10,500 starting on 6 April 2025. This change will help smaller employers, who may face higher costs due to the rate and threshold changes.

• Eligibility Change: The restriction that limited eligibility to employers with a secondary Class 1 National Insurance bill of less than £100,000 in the previous tax year will be removed. This will allow larger employers to claim the Employment Allowance as well.

4. Exclusions from Employment Allowance:

• Ineligibility for Certain Employers: Personal service companies, where the only employee is also the director, will still not be eligible for the Employment Allowance.

5. Impact on Special Groups:

• Upper Secondary Thresholds Remain the Same: The thresholds that apply to employees under 21, apprentices under 25, armed forces veterans in their first year of civilian employment, and new employees at special tax sites will remain unchanged.

• Rate Application: The 15% National Insurance rate will apply to earnings above these relevant upper secondary thresholds, which are designed to offer reduced or no contributions for certain groups of employees. However, the reduced thresholds for lower-paid workers will result in higher contributions for employers with part-time or lower-wage workers.

6. Increase in Class 1A and Class 1B National Insurance Rates:

• Class 1A Contributions: These contributions are paid by employers on taxable benefits in kind (such as company cars), taxable termination payments (severance packages), and taxable sporting testimonials. The rate for Class 1A contributions will increase from 13.8% to 15% starting on 6 April 2025.

• Class 1B Contributions: These apply to items under a PAYE Settlement Agreement, which is used for the reporting and payment of tax on non-cash benefits. The Class 1B rate will also increase to 15%.

7. Financial Impact on Employers:

• Employers with higher-paid employees will see a significant rise in their National Insurance bills due to the combined effect of the rate increase and the lowered threshold.

  • Example 1: An employee earning £20,000 will result in an employer’s National Insurance bill increasing from £1,504.20 in 2024/25 to £2,250 in 2025/26, an increase of £745.80.

  • Example 2: For an employee earning £100,000, the increase in National Insurance contributions will rise from £12,544.20 to £14,250, an additional £1,705.80.

• Small Employers with Low-Paid Employees:

  • Small businesses that employ lower-paid workers might benefit from the increased Employment Allowance. For example, an employer with three employees earning £30,000 will pay £3,652.60 in 2024/25 after applying the Employment Allowance but will only pay £750 in 2025/26 with the increased allowance.

  • Reduction in National Insurance Costs: Small employers may see reduced National Insurance liabilities because of the Employment Allowance increase, which may offset some of the impact from the threshold reduction.

8. Potential Challenges for Employers with Part-Time Workers:

• Employers who have employees earning below the new threshold of £5,000 (e.g., part-time workers in industries such as hospitality) may see a significant rise in their National Insurance contributions. The drop in the secondary threshold will impact these employers the most.

9. Strategies for Employers to Manage Costs:

• Claiming the Employment Allowance: Employers need to actively claim the Employment Allowance, as it is not automatically applied. It can provide significant savings.

• Hiring Strategies: Employers can reduce their National Insurance costs by hiring employees under 21 or armed forces veterans in their first year of civilian employment, as contributions are only due on earnings above £50,270. This can potentially save up to £6,790.50 per employee.

• Part-Time Employment: Employers may find it beneficial to employ two part-time workers instead of one full-time worker to take advantage of additional NIC-free bands, saving up to £750.

• Reevaluate Benefits: Employers should assess the taxable benefits they provide to employees and consider switching to exempt benefits to reduce Class 1A National Insurance liabilities.

• Review PAYE Settlement Agreements: Employers with PAYE Settlement Agreements should review them to ensure they remain cost-effective with the higher rates of Class 1A and Class 1B National Insurance contributions.

10. Long-Term Considerations:

• Cost Planning: Employers should factor in these changes into their long-term financial planning. Adjusting their workforce composition, rethinking employee benefits, and optimizing National Insurance payments through strategic hiring can help mitigate the increased costs.

These changes are substantial, and employers need to prepare for the increase in National Insurance contributions by understanding how the reforms will affect their business.