Employer National Insurance contributions will increase from 13.8 percent to 15 percent from April 2025, chancellor Rachel Reeves has confirmed in the first Budget from the Labour government.
The government will reduce the secondary threshold, the level at which employers start paying national insurance on each employee’s salary, from £9,100 pounds a year to £5,000 pounds.
Reeves admitted that by raising employer NI rates she was asking businesses to “contribute more” to stabilise public finances.
“This will raise £25 billion pounds a year by the end of the forecast period. I know that this is a difficult choice. I did not take this decision lightly. We are asking businesses to contribute more. And I know that there will be impacts of this measure, felt beyond businesses, too.”
Respite for SMEs
There was some respite for smaller employers as the chancellor said employment allowance will increase from £5,000 to £10,500 pounds.
Reeves said: “This means 865,000 employers won’t pay any national insurance at all next year, and over 1 million will pay the same or less than they did previously. This will allow a small business to employ the equivalent of four workers on the national living wage without paying any national insurance.”
However, Benoit Hudon, president and chief executive at Mercer UK, called the employer NI increases “a tax on growth” and “an additional financial burden on UK businesses”.
He said: “In the context of global markets, this rise will make each new UK recruit more costly, potentially stifling hiring, limiting pay rises, or possibly even leading to a reduction in benefits and/or pensions. Consequently, working people risk bearing the brunt of this increase, as businesses try to balance the books and remain competitive.”
‘Opportunity cost’
Hudon continued: “In the long run, this hike comes with a significant opportunity cost to the UK. Reduced economic growth means a smaller tax take for the Treasury, leaving them with an even smaller pot to invest in vital public services like social care and the NHS, at a time when investment is needed more than ever.”
Matt Russell, CEO of employee benefits technology provider Zest, said the spike in employer NI contributions “may curb salary growth”. But he added that employers will take creative steps to unlock cost-effective approaches to reward employees beyond simply raising wages.
“Employee benefits packages are one of the most effective ways that employers can deliver financial support to their workforce, over the last 12 months half (49 percent) of employers have already increased investment in their benefits package supporting with talent attraction and retention whilst boosting morale and productivity.”
Hit to pensions saving
Increases in employer NI have also been described as ‘a major setback’ to tackling the UK’s pensions under saving crisis, said Steve Webb LCP partner and former pensions minister.
“Current rules on automatic enrolment into workplace pensions require employees to make a 5 percent contribution and firms a 3 percent contribution, making 8 percent in total.
“It is widely accepted that this will not be enough for most workers to build up a reasonable standard of living in retirement. Even the government’s own estimates suggest that just over half (51 percent) of all employees or 17.7m people are not saving enough for a ‘moderate’ retirement.”
