The economic landscape of the UK is constantly evolving, and businesses must adapt to remain competitive. One significant change on the horizon is the increase in Employers’ National Insurance contributions (NICs) in 2025. This adjustment, announced in the Autumn Budget 2024, will have a direct impact on businesses of all sizes, particularly small and medium-sized enterprises (SMEs). This blog post will explain the specifics of the upcoming changes, explore their potential effects on businesses, and provide actionable strategies for mitigating the increased costs.
What's changing with Employers' National Insurance?
From April 2025, several key changes to Employers’ National Insurance will come into effect:
1. Increased rate
The rate of employer NICs will rise from 13.8% to 15%. This means that for every pound earned by an employee above the secondary threshold, employers will pay 15 pence in NICs, up from 13.8 pence.
2. Reduced secondary threshold
The secondary threshold, the level at which employers start paying NICs, will decrease from £9,100 to £5,000 per year. This means that employers will begin paying NICs on employee earnings much sooner.
3. Increased employment allowance
To help small businesses offset the increased NIC costs, the Employment Allowance, which allows eligible employers to reduce their NIC liability, will increase from £5,000 to £10,500. Additionally, the £100,000 eligibility threshold for the Employment Allowance will be removed, making it accessible to more businesses.
The Employment Allowance can be claimed with each payroll until the total allowance (£10,500) has been used. The amount is per business, not per employee, and can only be claimed against one payroll. Once the allowance is used, the NICs will need to be paid by the business.
The new change in regulations will significantly impact the financial burden on employers. While the increased Employment Allowance offers some relief, the combined effect of the increased rate and reduced threshold will likely result in higher NICs for many businesses.
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How could this affect small businesses?
1. Increased costs
The most direct impact will be higher payroll expenses. For example, as identified by the Centre for Policy Studies: with the current rate, an employer pays £1,617 in NICs for each full-time employee on minimum wage; with the increase to 15%, they will have to pay £2,583. This will strain budgets, particularly for small businesses with tight margins.
2. Reduced profitability
Higher employment costs can lead to reduced profitability. Businesses may need to absorb these costs, leading to lower profits, or pass them on to customers through higher prices, which could affect competitiveness.
3. Hiring challenges
The increased cost of employment may make businesses more hesitant to hire new employees. This could hinder growth and expansion plans.
4. Administrative burden
Implementing these changes will require adjustments to payroll systems and processes, adding to the administrative burden for small businesses.
How can small businesses offset higher costs?
1. Review payroll structures
Businesses can explore alternative payroll structures to minimise their NIC liabilities. For example, offering benefits-in-kind (such as childcare vouchers or cycle-to-work schemes) can reduce taxable earnings and lower NI contributions. However, it’s important to ensure that any changes comply with HMRC regulations.
2. Invest in technology
Automating payroll processes can help businesses reduce administrative costs and improve accuracy. Payroll software can also provide real-time insights into NIC liabilities, enabling businesses to plan more effectively.
3. Optimise staffing levels
SMEs may need to reassess their staffing levels and consider whether part-time, freelance, or contract workers could be a more cost-effective option. Although this method requires careful planning to maintain productivity, it can lead to lower total employment expenses.
4. Claim Employment Allowance
The Employment Allowance will allow eligible businesses to reduce their NICs bill by up to £10,500 per year. SMEs should check whether they qualify for this relief and ensure they are claiming it correctly.
5. Increase efficiency
Improving operational efficiency can help offset higher costs by reducing waste and maximising productivity. This could involve streamlining processes, renegotiating supplier contracts, or investing in employee training to enhance skills and performance.
6. Pass on costs to customers
In some cases, businesses may need to pass on the increased costs to customers through higher prices. While this approach requires careful consideration to avoid losing customers, it can help maintain profitability in the face of rising expenses.
How can an accountant help small businesses?
For small businesses, especially those with tight budgets, understanding and adapting to the Employers’ National Insurance changes can be difficult. An accountant’s expertise becomes invaluable in this situation. Here’s how they can help:
1. Expert guidance
Accountants can provide expert advice on how the NIC changes will affect your business and recommend strategies to minimise the impact. They can also help you stay compliant with the latest regulations, thereby lowering the risk of penalties.
2. Payroll management
Accountants can manage your payroll processes, ensuring that NIC contributions are calculated accurately and submitted on time. This will not only save you time but also decrease the possibility of errors.
3. Tax planning
Accountants can help you identify tax-efficient ways to structure your business and remunerate employees. For example, they can advise on the use of benefits-in-kind or salary sacrifice arrangements to reduce NIC liabilities.
4. Financial forecasting
By analysing your financial data, accountants can help you forecast the impact of the NIC’s changes on your cash flow and profitability. This can inform your decision-making and help you plan for the future.
5. Access to reliefs and allowances
Accountants can ensure that you are taking full advantage of available reliefs and allowances, such as the Employment Allowance, to reduce your NIC bill.
6. Strategic advice
Beyond NICs, accountants can offer strategic guidance to help your business expand and become more profitable. This could include identifying new revenue streams, optimising costs, or exploring funding options.
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