It's Time to Cope with the National Insurance Hike
Evolution of Employee National Insurance Contributions and Potential Impacts for Workers
Get ready, businesses! From April 6, employers will face a hike in National Insurance (NI) contributions, following the changes announced in the Autumn Budget.
This hike is twofold. Firstly, the employer contribution rate is increasing from 13.8% to 15%. Secondly, the threshold at which businesses start paying the tax on an employee's salary will drop from £9,100 a year to £5,000.
A survey conducted by the British Retail Consortium earlier this year suggested that around two-thirds of businesses might consider raising prices to offset these costs. Additionally, roughly half of the businesses indicated they would look to reduce work hours, overtime, or staff headcount.
To provide some context, cosmetics giant Lush, with 3,600 employees in the UK and Ireland, will need to find an extra £2.7 million annually. Car servicing and repair company Kwik Fit estimates it would need to set aside £5 million to cover the costs across its 5,000 employees.
Your weekly earnings
The NI hike coincides with the National Living Wage increasing by 6.7%, putting more pressure on businesses. UK retailer Next has previously revealed that its wage bill could surge by £67 million due to this wage increase.
Class 1 National Insurance rate
Facing a challenging economic environment, UK growth forecasts for 2025 have been scaled down. Both the Bank of England and the Office for Budget Responsibility have slashed their projections in half - from 1.5% to 0.75%, and from 2% to 1% respectively.
How much you will pay if you earn £1,000 a week
Consultancy Capital Economics has also adopted a pessimistic tone. Higher business taxes, an uncertain global backdrop, and the impact of tariff wars have been a bigger drag than initially thought, the consultancy noted.
The Government's Rationale for the NI Hike
£0-£242
Chancellor Reeves found herself in a tight spot when she announced the NI increase last October. Labour had pledged not to raise taxes for working people but needed funds to support public services and meet their fiscal rules.
0%
Given this predicament, taxing businesses seemed like a quick solution. However, critics argue that this hike will undoubtedly affect working people, as businesses have warned that wage growth will be limited, layoffs could increase, and inflation will rise.
£0 on the first £242
The British Chambers of Commerce's latest quarterly survey shows that business sentiment is low following the Autumn Budget last year. Fewer firms reported increased sales, investment, and confidence, with taxation remaining a top concern for 59% of respondents.
"The business sentiment is in a slump following the Autumn Budget last year, and this fresh data shows no improvement," said the BCC's head of research, David Bharier. "Costs have piled on businesses simultaneously, particularly tax rises (specifically the NI increase) and the uncertainty surrounding the global tariff war."
£242.01 to £967
The government aims to limit the impact of the NI policy on small businesses by expanding existing tax relief measures, known as the employment allowance. "This means 865,000 employers won't pay any National Insurance at all next year, and over one million will pay the same or less than they did previously," Reeves said.
8%
Who Pays National Insurance?
£58 on the next £725
National Insurance is the government's second-biggest source of revenue, after income tax. In the 2022/23 tax year, NI contributions totaled over £179 billion, accounting for 22% of total tax receipts.
Employers hold the bulk of the NI bill, representing 61% of the total in 2022/23, compared to the 35% paid by employees. Some self-employed individuals are also required to pay NI contributions, depending on their profits.
Over £967
Employee NI contributions are split into primary (paid by employees) and secondary (paid by employers) contributions, with the rates dependent on the weekly earnings.
2%
For an employee earning £1,000 a week, the current employee contribution would be £58.66 per week, as shown below:
66p on the next £33
| Weekly earnings | Class 1 NI rate | Weekly contribution if you earn £1,000 || --- | --- | --- || £0-£242 | 0% | £0 on the first £242 || £242.01 to £967 | 8% | £58 on the next £725 || Over £967 | 2% | 66p on the next £33 |
Under current rules, employers begin making NI contributions when an employee's salary hits £175 per week, equivalent to £9,100 a year. Starting from April 6, 2025, this threshold drops to £96 per week or £5,000 a year.
Employers currently pay contributions at a rate of 13.8%, which will increase to 15%. This change means employers will pay around £22 per week or more than £1,100 a year in additional NI once an employee earns £1,000 a week.
Employer Tax Relief
Employers can claim a tax relief measure called the employment allowance, which allows them to reduce their annual NI liability by up to £5,000 in total.
To qualify for this allowance, the annual NI liabilities in the previous tax year must have been less than £100,000. However, in light of the NI increase, the government has announced that the employment allowance would be increased to £10,500 per year, and the threshold removed, making it possible for most businesses or charities to claim this allowance.
- Given the increase in National Insurance contributions for businesses, some may consider adjusting their financial strategies by potentially raising pensions costs to offset these expenses, as the hike could severely impact their finances.
- The British Chambers of Commerce's latest survey indicates that businesses are concerned about the combined impact of the National Insurance hike and other cost pressures on their overall business health, drawing attention to the potential for reduced work hours, increased layoffs, and higher inflation rates, which could have a ripple effect on pensions and overall economic stability.
