The Rising Tide: How will National Insurance Increases Affect Employers?

In January 2025, the National Insurance Contributions (Secondary Class 1 Contributions) Bill reached the House of Lords Committee Stages. With Royal Assent expected shortly, we explore what this legislation means for businesses and what employers need to consider in the months ahead.

What is changing?

Employers currently pay Secondary Class 1 employer National Insurance Contributions (“NICs”) at 13.8% on the amount by which an employee’s earnings exceed the secondary threshold of £9,100 per year or £175 per week.

From 6 April 2025, employers will face two significant changes: 

• The rate of Secondary Class 1 NICs will increase by 1.2 percentage points, from 13.8% to 15%
• The threshold at which employers become liable to pay Secondary Class 1 NICs on employees' earnings will be reduced from £9,100 to £5,000. 

The Government estimates that these changes will generate an additional £25 billion in annual revenue. However, the Office for Budget Responsibility suggests 60% of increased NICs costs could initially be passed to employees (increasing to 76% long term).

For employers, the immediate impact will be a significant increase in NIC liabilities and how to manage this whilst mitigating any effect on employees.

What can businesses and employers do?

As a measure designed to support smaller businesses, employers will be able to benefit from an increase in the amount of the annual Employment Allowance, which will be increased from £5,000 to £10,500 from 6 April 2025.

Additionally, the current eligibility restriction will be removed (currently only employers whose secondary class 1 liabilities for the previous tax year is less than £100,000 are eligible to claim the Employment Allowance). Eligible employers can offset the Employment Allowance against their NIC liability, which in some instances could reduce the liability to £0.

For employers with large payrolls, small profit margins or those in lower-wage sectors such as care, retail or hospitality, the Employment Allowance offers limited relief, leaving businesses to consider alternative solutions to tackle rising costs.

Employers in certain sectors, such as retail, have already stated that consumer prices will need to increase and job losses will be inevitable. As always, employers should keep an open mind and explore all potential alternatives before implementing compulsory redundancies. Changes to working arrangements and contractual terms, including reduced pay and benefits, can sometimes be agreed with staff,  but this provides limited relief where employees are already on national minimum wage.

One possibility to reduce an employer’s NICs liability could be to consider providing more employee benefits via salary sacrifice arrangements. Where an employees’ gross salary is reduced by an amount used to acquire a benefit, a subsequent reduction in employer NICs arises (as a result of the reduced salary) which creates a NICs saving. This may mean cycle to work, pension salary sacrifice, electric vehicle or purchasing additional holiday schemes become more attractive.

Ultimately, some employers may have little choice but to implement or increase lower cost and more flexible staffing models involving zero hour contracts or agency workers. Whichever route employers decide to take, they must be mindful of the new Employment Rights legislation which will start to roll out and likely impact people processes and costs over the next 12 to 18 months.

How to stay compliant

In practice, changes in the rate of NICs are not unusual and most payroll providers will be prepared to implement the changes from April 2025.

However, the increase in employers NICs to 15% can also apply to some benefits in kind and lump sum payments made to employees. As of April 2025, benefits in kind can be voluntarily processed through payroll making implementing the increase in employers NICs rates straightforward. P11D and P11D(d) forms will also remain available.

From April 2026, it will become mandatory for employers to use payroll software to report benefits in kind (with the exception of employee accommodation and employment related loans).

Employers should continue to ensure they work with their payroll teams to confirm all deductions are calculated, reported and accounted for correctly. HMRC can impose penalties for employers which do not take reasonable care when operating PAYE.