A national insurance contribution (NIC) is a form of tax in the UK that funds social security benefits like the State Pension.

Following the Budget on Wednesday 30 October 2024, the Chancellor announced that the government will increase the employer rate from 13.8% to 15% from 6 April 2025. Currently, the main rate of Class 1 employee NICs is 8%. The employer rate is 13.8%.

From 6 April 2025, employers will face:

• An increase in the secondary Class 1 NIC rate from 13.8% to 15%.

• A reduction in the secondary threshold from £9,100 to £5,000, meaning more of employees’ earnings will be subject to NICs.

• An increase in the employment allowance from £5,000 to £10,500, providing relief for small employers.

• Higher Class 1A and Class 1B NICs on benefits-in-kind and PAYE settlement agreements, also rising to 15%.

While the employment allowance increase will shield some smaller employers, larger businesses will see a significant rise in costs.

Understanding the Changes in Employers’ NICs

Employers pay secondary Class 1 NICs on employee earnings above the secondary threshold.  Unlike employees’ NICs, which have different bands, employer contributions are charged at a flat rate once earnings exceed the threshold.

Current and Future Secondary Thresholds

• 2024/25: £9,100 per year (£758 per month, £175 per week).

• 2025/26: £5,000 per year (£416 per month, £96 per week).

This means employers will start paying NICs on a greater proportion of each employee’s salary.

What impact will the NIC Increase have on Employers?

The combined effect of a lower threshold and a higher NIC rate means that businesses will pay more NICs per employee.

How to offset increased employer National Insurance costs

Employers can lower the amount of National Insurance they pay by implementing pension salary exchange, also referred to as salary sacrifice. Employees who participate in pension salary exchange also benefit from the fact that they save money on national insurance based on how much they choose to contribute to the workplace pension plan.

Pension salary exchange

Pension salary exchange should not be confused with a separate pension scheme. Rather, it represents a more effective method for channeling contributions into a workplace pension plan. In a pension salary exchange arrangement, employees consent to a reduction in their
salary, and in exchange, their employer increases their pension contribution by a corresponding amount. This method of contributing to pensions results in a decrease in the National Insurance contributions for both the employer and the employee.

What are the benefits of pension salary exchange?

Effective from 6 April 2025, the organisation will benefit from a 15% reduction in National Insurance contributions based on the amount employees elect to contribute to the pension scheme through salary exchange.

The organisation has the option to either retain the savings from employer’s national insurance or to allocate some or all of these savings as an additional contribution to the pension plan. Employees will also benefit from national insurance savings at their marginal rates (8% or 2%) on the contributions they opt to make, resulting in an increase in their take-home pay compared to the net pay or relief at source tax relief methods.

For those participating in the pension salary exchange, If the company pension plan currently utilizes the relief at source method, higher and additional-rate taxpayers will receive tax relief at their highest marginal rate immediately, eliminating the need to reclaim any additional tax relief through self-assessment annually. It enhances the employee benefits package provided to employees.

Conclusion

The rise in employers’ National Insurance Contribution rates, coupled with the decrease in the secondary threshold, will impose a considerable strain on businesses starting in April 2025. Although the enhancement of the employment allowance will provide some relief to small employers, larger enterprises are expected to experience significant increases in costs.

Employers should:

1. Evaluate the effects of increased National Insurance Contributions on payroll expenses.
2. Explore the possibility of reorganizing workforce strategies to minimize liabilities.
3. Utilise categories of employees that are exempt from National Insurance Contributions
whenever feasible.
4. Examine benefits-in-kind and payroll frameworks to ensure operational efficiency.