Rachel Reeves’ Budget introduced several changes for employers, many of which are due to come into force in April 2025. By far the most significant of these, however, is the increase to employers’ National Insurance contributions (NIC), which for many employers is set to make the cost of employment more expensive.
Fortunately, tools are available for employers to offset the cost of the increases. Below, take an in-depth look at these tools, and explain how a long-term action plan can help to tackle broader people risk.
Main changes from the October Budget
You can find our full on-the-day summary of the changes here (opens a new window), but the main takeaways to emerge from the budget were as follows:
Employers’ NIC will increase from the current rate of 13.8% to 15%, from April 2025
The threshold at which employers become liable to pay NIC will reduce from £9,100 to £5,000 from April 2025
Inheritance tax will be charged on ‘unspent pension pots’ from April 2027
Personal taxation thresholds will increase by inflation annually from the 2028/2029 tax year
How does the budget affect employers?
National Insurance
For employers, the cost of employment will – at least for those outside of small-to-medium enterprises (SME)s – become more expensive.
With the reduction to the threshold at which employers’ NIC kicks in, employers will see an increase of 1.2 percentage points on the rate of their NIC contributions from April 2025.
However, for many employers, the full cost of the increase in employers’ NIC is far greater than headline figures suggest. This is even before factoring in the 10% increase to minimum wage for employees over 21 (and 20% increase for those under 21).
According to latest government data (opens a new window), the mean average UK weekly wage is £693pw, equivalent to £36,000pa. If we use this figure to compare the current employers’ NIC costs scenario with the future costs once the increase in employers’ NIC comes in, the impact becomes clear:
Current scenario | From April 2025 | |
Mean average pre-tax UK salary (as of November 2024) | £36,000 | £36,000 |
Employer NI threshold | £9,100 | £5000 |
NI-applicable salary | £26,900 | £31,000 |
Employer NI rates | 13.8% | 15% |
Total employer NIC costs | £3,712.20 | £4,650.00 |
% of mean average UK salary | 10.31% | 12.92% |
For many employers, this amounts to a real increase in annual costs to UK employers of £937.80 per employee, or 25%.
With wage growth currently running at 4.9% (1.7 percentage points over the current rate of inflation) and the significant increase in employers’ NIC to come, it is highly likely that we will see wage growth drop to cover the NIC increase.
It is worth noting, however, that this figure excludes the impact of changes to Employment Allowance, which allows businesses to claim back up to £10,500 from HMRC on their overall employer NIC.
Inheritance tax on unspent pension pots
While the change to inheritance tax has less impact on employers, it ultimately remains an employee consideration. The challenge for employers will be how to communicate any change to pension schemes and manage the subsequent impact on employee engagement.
The impact on employers’ people strategy
For employers, these changes are likely to require a substantial shift in their overall people strategy:
Employer NI contributions will increase from April 2025, so there is not long to prepare.
The pension IHT development brings engagement challenges, with an even greater need for advice around retirement planning in the coming years.
Hiring staff will become more expensive. Employers’ focus is likely to move from recruitment to retention to ensure key talent stays within the organisation.
Benefits costs will need optimising to ensure ‘bang for buck’.
De-duplication and optimisation will become the watchwords into 2025.
Many businesses will likely absorb some of the additional costs, but others will need to look at ways to pass them on. Particularly in the initial stages, much of this is likely to fall on customers. Over time, however, employees are likely to feel the greater effects, by way of a restriction on wage growth over the coming years.
The benefit of salary sacrifice
The most immediate and obvious way that businesses can reduce their employer NIC is by taking advantage of salary sacrifice benefits.
Employee benefits via a salary sacrifice arrangement provide an opportunity for a reduction in Employer Class 1& 1A NIC. These reductions are primarily realised through the employee giving up a proportion of gross salary to obtain the benefit, which leads to a subsequent reduction in employer NIC liability from the lower salary. A NIC saving can also be obtained through more favorable Benefit in Kind taxation rates for certain benefits, such as electric vehicles.
The key employee benefits that can generate an employer NIC saving are:
Pension salary sacrifice – the most beneficial form of salary sacrifice. While popular, there are still a number of employers who do not take advantage of this mechanism, and are therefore already missing out on the potential savings.
Electric vehicle leasing – a notable opportunity for employers to mitigate NIC increases, with relatively low employee utilisation and high values generating significant levels of salary exchange.
Cycle to work – a popular benefit among employees, albeit generating lower levels of salary exchange.
Additional holiday purchase – reasonable employee uptake, but with limited scope to the levels of salary exchange.
Childcare vouchers – closed to new entrants October 2018, with savings restricted to those already realised.
Employers who offer pension salary sacrifice on an ‘opt in’ basis should consider a switch to automatic enrolment for new joiners. They should also look to communicate the benefits of salary sacrifice to existing employees who aren’t taking advantage of the mechanism.
Some employees will no doubt see this as a reaction from their employer to the additional employer NIC costs. However, employers should not be afraid of being open and honest about this, and focus on educating those employees on the significant savings an employee can make also. As ever, communication will be key.
Revisiting the case for benefits
Cost of employment is likely to be at the top of the business agenda for many years to come. Although businesses should explore salary sacrifice as soon as possible, the Government may introduce future measures to curtail or remove this mechanism. Therefore, it is vital to revisit the business case for benefits at the earliest opportunity.
In practice, this means undertaking a review of your existing benefits, and creating a plan for what you need and want from your benefits in the year ahead. You may want to ask the following questions:
Where are you now? What does benefit engagement look like? Do your benefits meet your workforce needs? Where are the gaps? Do you have duplications?
Where do you want to be? A better employee value proposition? A total-reward model? Better data insights? Greater cost control?
How can you get there? Do you have the knowledge or expertise to support you on your journey?
Further information
Visit our People Solutions (opens a new window) page for more information about what the budget means for you and your business, or reach out to a member of our team.
