How to manage the increase in employer National Insurance contributions

Hiring employees may be a key part of your growth plans if you run a start-up or small business.

With an increase in employer National Insurance contributions (NICs) announced in the 2024 Autumn Budget set to come into effect in April 2025, you might be wondering how your business could be affected.

For those who already have employees, you may be wondering how to manage any additional costs.

Start-ups and small businesses may need to rethink their strategies to handle an increase in employer NICs while focusing on growth in the coming years.

So, what exactly are these changes, and what do they mean for you as a small business owner?

In this article, we’ll explore various strategies employers can use to lessen the impact of the employer NIC increase.

Read our first-time employer’s guide to hiring staff.

What are employer NICs, and how do they work?

Employer National Insurance contributions are payments businesses make to the government based on their employees’ income.

These contributions help fund state benefits and public services, including the NHS, state pensions, and unemployment benefits.

Employers calculate and pay NICs on behalf of employees under the State Pension age – these are separate from employee NICs, which are deducted from salaries through PAYE.

Employer NICs are calculated as a percentage of an employee’s earnings above a government-set threshold.

The government usually announces the rate and amount each year, and any changes can affect how much businesses pay for their workers.

Some smaller businesses may qualify for the Employment Allowance, which reduces an employer’s NICs bill by a specified amount each year.

This allowance is intended to support smaller businesses by reducing the cost of hiring employees.

Getting ready to employ staff? Read our PAYE tax guide for small businesses.

How would an employer NIC increase affect employers?

The Autumn 2024 Budget has meant various changes for small employers and start-ups regarding employer NICs.

1. A reduction in the Secondary Threshold

The Secondary Threshold is the earnings level at which employers start paying NICs on an employee’s salary.

This will be reduced from £9,100 to £5,000 per year from 6 April 2025 and frozen until 5 April 2028.

After this, the current plan is to adjust it annually based on the CPI (Consumer Price Index).

This index tracks the change in the cost of living over time, so it is used as a measure of inflation.

2. An increase to the employer Class 1 NICs rate

The rate of employer NICs will increase from 13.8% to 15% from 6 April 2025.

This is the percentage of an employee’s salary above £5,000 that must be paid as employer NICs from 6 April 2025.

3. An increase to the Employment Allowance to £10,500 a year

To mitigate the impact on smaller businesses, the Employment Allowance will increase from £5,000 to £10,500.

This means qualifying businesses won’t need to pay the first £10,500 of employer NICs.

In addition, the £100,000 eligibility threshold will be removed from 6 April 2025 so that all eligible employers can benefit.

Read our guide to Employment Allowance for start-ups.

The government says these changes have been made to raise money to fund public services while providing some relief to smaller businesses.

This change will mean that 865,000 employers will pay nothing in national insurance contributions in 2025.

How to mitigate the increase in NICs

While the changes around employer NICs may sound daunting for start-ups and smaller businesses, there are several strategies you could consider to minimise the impact on your business.

Making the most of adjustments announced in the budget is a great starting point.

Other options could mitigate employer NICs’ costs and help your business thrive over the coming months and years.

Here are just some you might want to consider.

Use the Employment Allowance

First, ensure your business qualifies for the Employment Allowance.

This allowance is designed to help smaller businesses by reducing their NICs bill.

Make sure you’re claiming the full Employment Allowance available – up to £10,500 per year from April 2025.

This can directly reduce the NICs you owe, helping to offset any increases due to new rates or thresholds.

However, the overall impact will depend on the size of your business and the number of people you employ.

Claim NICs relief if you hire veterans

Hiring veterans can help mitigate the effect of increased employer National Insurance contributions (NICs).

The government offers an incentive where businesses do not have to pay employer NICs for the first 12 months of a veteran’s civilian employment, up to a certain earnings threshold.

This relief applies to veterans who have left the regular armed forces.

This one-year holiday is available from the first day of employment and applies to the upper secondary threshold.

Employers can find out more by visiting Gov.uk.

Implement salary sacrifice schemes

Consider whether salary sacrifice schemes could be a good idea for your business.

This arrangement allows employees to give up part of their salary in exchange for non-cash benefits.

As salary is given up before tax and National Insurance contributions (NICs) are calculated, both the employee and employer can save on these payments.

The employee pays less income tax and NICs, while the employer reduces their NICs liability.

Non-cash benefits might include:

• additional pension contributions
• childcare vouchers
• a company car.

If you’re considering any of these options, it’s important to comply with all relevant tax and employment laws.

Consider consulting a tax expert or employment law specialist to make sure any schemes are set up correctly and that you will maximise the potential tax savings or implications.

Read more about how to pay employees fairly.

Consider a flexible benefits package

Flexible benefits packages can be a more cost-effective alternative to salary increases.

Offering benefits in addition to a workplace pension could help you maintain affordable salary levels while offering value to your employees.

This approach could help you retain staff without significantly raising your payroll costs.

The types of additional benefits you could offer might include:

• private health or dental insurance
• gym memberships or discount schemes
• additional paid time off or sabbaticals
• commuter benefits or travel allowances.

Review your workforce

Consider part-time or flexible working arrangements to manage payroll costs more effectively while still meeting business needs.
Your options might include:

• part-time work
• freelance work
• fixed-term contracts rather than permanent roles.

Existing employees might be happy to adjust their work hours, too.

Making these adjustments could help by reducing the cost of your overall payroll and offering you cost-effective access to the skills you need.

Look at salary vs dividends

If you own your small business, think about reviewing your current split of salary and dividends.

You might be able to mitigate the impact of increased costs by managing the balance between these.

As dividends are not subject to NICs, you may be able to improve your start-up’s overall tax efficiency and keep more profits within the business.

If you’re considering this option, it’s best to consult a tax advisor who can help you manage the complexities of dividend taxation.

Maximise any other tax reliefs or credits you’re entitled to

Make sure you know all available tax reliefs, credits, and government incentives – and take advantage of them.

For example, companies investing in innovation can benefit from tax relief, allowing you to claim back some of your research and development (R&D) costs.

Schemes and tax relief are also available for exports or goods and services that qualify for reduced VAT rates or exemptions.

Discover more ways to minimise your tax liability.

Strengthen your financial planning

Incorporate the NICs increase into your budget and financial forecasts.

This will help you anticipate changes and adjust your business strategy accordingly.

Talking to an accountant could help you understand the changes, pros and cons, and alleviate the administrative burden.

Read more about how to reduce costs and increase profits.

Raise money to invest in your business

You could consider investing in your business to help you become more productive and grow.

For example, you may wish to invest in training to improve employee skills, reducing the need for new hires.

Investing in automation or new technology could help to future-proof your business and boost efficiency.

You could also implement energy-saving measures to help you cut operational costs.

To fund your productivity and growth plans, you might consider applying for a Start Up Loan.

A Start Up Loan provides government-backed personal loans of up to £25,000 with a fixed 6% interest rate, plus a year of free business mentorship, available to businesses who have been trading for less than three years.