Navigating National Insurance increases and rising employee costs

The controversial increase in the threshold and rate for national insurance contributions also brings some relief for smaller businesses through an adjustment to the annual Employment Allowance.

Director in our employment team Rob Smedley explains this important benefit.

National Insurance - what has changed?

Employers previously paid 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, there were two significant changes for employers:

• The rate of Secondary Class 1 NICs is increased 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 is 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).

What can employers do about National Insurance Contributions?

As a measure designed to support smaller businesses, employers can benefit from an increase in the amount of the annual Employment Allowance, which is increased from £5,000 to £10,500 from 6 April 2025. 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, the Employment Allowance offers limited relief, leaving businesses to consider alternative solutions to tackle rising costs.

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.

As always, employers should keep an open mind and explore all potential alternatives before implementing headcount reduction and redundancies to reduce employee costs. Changes to working arrangements and contractual terms, including reduced pay and benefits, can sometimes be agreed with staff, but there needs to be careful advance planning and adherence to process. Changing individual employee terms and conditions needs a fair legal process, just in the same way as any proposed redundancy or restructure scenario.

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 Bill legislation which will start to roll out and impact people processes and costs over the next 12 to 18 months.