When will the employer’s national insurance increase?

What does it mean for payroll and HR teams that the Treasury is reportedly considering increasing national insurance contributions to employers in the next Budget?

What can happen to the employer’s national insurance?

The new Labour government famously stated that it needed to plug a PS22-billion black hole in the nation’s finances.

The Autumn Budget, which is scheduled to take place on October 30, will see the chancellor Rachel Reeves implementing tax increases and spending reductions worth PS40 billion.

Labour has pledged not to increase income tax for employees or National Insurance. It states in its manifesto, “Labour won’t increase taxes on workers, that is why we won’t increase the basic, higher or additional rates or VAT.”

Reeves may increase the rate at which employers pay NI, and there is speculation that this could happen in two weeks.

What is the employer’s contribution to national insurance?

Employers are responsible for paying 13.8% of the employee’s earnings over a PS9,100 threshold. Employers also pay 13.8% Class 1A and class 1B NI on the expenses and benefits that they provide to their employees.

Small employers can reduce their NI bill by receiving an employment allowance. The employer can reduce their NI bill by up to PS5,000 in the tax year 2020/21.

The starting rate for employees has been cut twice in 2024. First, it was reduced from 12% in January to 10%, then 10% down to 8% following the Spring Budget.

According to the Institute for Fiscal Studies, in 2023-24 employer NI contributions will raise PS109 billion. Employee contributions raised PS60billion.

What would be the increase in employer’s national insurance?

It is unclear. According to a analysis of hypothetical tax changes, a 1 percentage point increase to 14.8% would generate PS8.5bn by 2025/26, and even more in subsequent years.

Some economists claim that an increase in employer NI contributions will still have a negative impact on employees because employers may lower wages, reduce hiring due to the costs involved, or offer fewer hours.

Paul Johnson, Director of the Institute of Fiscal Studies said that an increase in employer NI contributions was a “straightforward violation” of Labour’s pledge because it did not differentiate between employer and employees contributions.

What do business people think?

Businesses that are labor-intensive will feel the squeeze more than other businesses. Kate Nicholls, UKHospitality’s chief executive, described the move as a tax on jobs if it proceeds, because it will increase the cost of employment for a sector that is heavily dependent on people.

The Federation for Small Businesses stated that the increase would be “antigrowth” and hinder job creation for smaller employers.

Employers will be required to pay National Insurance for pension contributions.

Former pensions minister Sir Steve Webb stated earlier this month that imposing an NI charge on employer’s pension contributions, which are currently tax-free, could generate around PS16 billion.

Many people have speculated that the Budget may include plans to require employers to pay NI on pension contributions.

According to the Association of British Insurers, millions of employees will have a lower retirement income if this happens.

The ABI’s director of long-term saving, health and protection, and policy, Yvonne Braun said, “We want to see employers incentivised into providing good pensions for workers.”

These changes would negatively impact both. The changes would also result in lower retirement standards for future generations, at a moment when we are already failing to save enough money over the long-term.

explores other options for raising revenue by pensions expert Steve Herbert. These include removing tax-free money at retirement, or reducing the tax relief on employee pension contributions.

What will the changes in National Insurance mean for contractors?

In 2021 IR35 rules or off-payroll rules will come into effect. If a business is deemed to be “deemed employer” for a contractor it must pay appropriate tax and national security.

Many businesses have decided to put contractors on the payroll in response to the new legislation. This is to avoid fines for not paying enough tax and national insurance.

Seb Maley is the CEO of Qdos contractor insurance. He said that any increase in employer’s NI contributions will not only mean an increase in direct costs for those on payroll but also a potential indirect cost because non-compliance to IR35 regulations would result in a higher cost.

He said: “In essence, HMRC will increase tax bills for firms that mismanage these controversial rules. This highlights how important it is for businesses to meet their compliance obligations.

Businesses that insist on paying contractors regardless of whether they are IR35 or not need to rethink this stance if the cost of hiring staff increases.

He said that putting these contractors on payroll or creating new employment contracts in order to reduce the risk would cost more.

When will the National Insurance changes take effect?

Changes to income tax announced by an autumn budget are usually effective at the beginning of the following tax year which is the 6th April 2025.

There is precedent that these changes can be implemented earlier. This was the case last year, when National Insurance for Employees fell from 12% down to 10%.

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