Impact of the Employers National Insurance Increase: What Businesses Need to Know?

The increase in Employers’ National Insurance will take effect on 1^st April 2025.

The rate will rise from 13.8% to 15.0%, and the threshold for contributions will be reduced from £9,100 to £5,000.

Consequently, from April 2025, employers will be required to pay NI at a rate of 15.0% for employees earning over £5,000.

As an example, if an employee’s gross salary is currently £30,000, the employer will experience an increase of £866 in National Insurance costs for that employee.

Consequently, the total cost of employing someone with a salary of £30,000 will rise to £33,750 next tax year (2025/26), compared to £32,884 in the current tax year (2024/25).

To protect small businesses the employment allowance is increasing by £5,500 from the current amount of £5,000 to £10,500.

The employment allowance can be used as a deduction against Employers National Insurance liabilities.

For instance, a small business owner with six employees earning £30,000 each will see no increase in their Employers National Insurance next year. With a calculation of £866 per employee (see above example) multiplied by six employees totalling £5,196, this amount is fully covered by the £5,500 increase in the Employers allowance.

For instance, a business with 50 employees each earning £30,000 annually will experience an increase in employer NI contributions of approximately £43,300.

This adjustment raises the total wage bill from £1,644,200 to £1,687,500 before any Employment Allowance or other reliefs are applied. This change represents a relatively modest 2.63% increase in total payroll costs.

However, sectors with large workforces earning lower, often part-time wages—such as hospitality and leisure—will experience a disproportionate effect from the NI increase.

Consider a business with 50 employees earning £9,100 each per year. In this case, the increase in employer NI contributions will be around £30,750, bringing the total wage bill from £455,000 to £485,750. This equates to a 6.76% increase in payroll costs, a substantially higher impact than in the previous example.

While the NI increase might result in a moderate cost increase for businesses with full-time, higher-paid employees, it poses a greater challenge for businesses with high staff numbers and lower wages. This disproportionate effect could strain businesses in industries heavily reliant on part-time or lower-wage employees, potentially affecting their financial sustainability more acutely.

Businesses with a sole director and no employees are ineligible for the Employment Allowance. Consequently, if they continue to receive the optimal director’s salary of £12,570, the Employer’s National Insurance contribution will increase from £479 per year to £1,136 per year.

For a more in-depth analysis, please refer to our blog on the Optimal Director’s Salary.

The government’s decision to increase employer NI contributions and reduce the threshold aligns with broader efforts to raise revenue to support the UK’s public spending, especially in health and social care.

National Insurance is a key component of funding for public services, and these changes are expected to generate significant additional revenue.

Adapting to these new additional costs will require thoughtful adjustments to business strategies. Here are some proactive steps businesses can take:

Review Payroll Budgets: Businesses should reassess their payroll budgets to account for the higher NI rate and the lowered threshold. By factoring in these changes early, businesses can better prepare for their financial impact.

Optimise Workforce Planning: Employers may consider restructuring roles or adjusting part-time and flexible work arrangements to manage costs effectively. Prioritising efficiency within the workforce and identifying ways to improve productivity could help offset some of the increased NI expenses.

Consider Salary Sacrifice Schemes: Some companies may explore tax-efficient remuneration options like salary sacrifice schemes, where employees opt to exchange part of their salary for non-cash benefits, reducing the NI liabilities for both employers and employees.

The increase in Employers’ National Insurance (NI) contributions is projected to generate £25 billion for the Treasury. However, this substantial financial burden on employers is likely to impact job creation and limit salary increases.

Fortunately, the smallest businesses will be shielded to some extent by the rise in the Employment Allowance. However, the upcoming expansion of employment rights could further dampen incentives for hiring.

An unintended consequence of these changes may be a notable rise in self-employment and off-payroll working arrangements. As a result, employment status could once again become a focal point of public and regulatory discussions.