Employer NI hike will hit wages, admits Chancellor
by Sara White, Editor, Business & Accountancy Daily
Chancellor Rachel Reeves was forced to defend the decision to increase employer’s national insurance to 15%
Doing the media rounds after her first Budget, Chancellor Rachel Reeves said: ‘It will mean that businesses will have to absorb some of this through profits and it is likely to mean that wage increases might be slightly less than they otherwise would have been.’
The decision to increase NI on employers not employees, reflected Labour’s manifesto commitment, on Channel 4 News Reeves stressed. ‘The alternative was increasing income tax and national insurance directly on working people.’
The Chancellor also said that the increase in the employment allowance to £10,500 would help the smallest businesses, giving them an NI exemption for up to four members of staff, despite slashing the secondary threshold to £5,000.
The 1.2% increase in employers’ national insurance contributions is set to raise an eye-watering £23.7bn a year according to Treasury calculations, but these have been tempered by the Institute of Fiscal Studies (IFS) which warned that business behaviour would change.
There are concerns the increase will lead to lower wages, higher unemployment and a general dampening of pay rises.
Alexander Simpson, partner at Evelyn Partners put the rise into context for businesses, with a stark calculation of the impact, which will hit all sizes of company, charity and private sector organisation, with only the public sector exempt.
‘The impact of a 1.2% increase in the employer NIC rate will be significant for many businesses,’ said Simpson. ‘An employer with an annual wage bill of £5m across 100 employees would currently have an employer NIC liability of approximately £564,000.
‘From April 2025, employer NIC costs in this example will rise to approximately £664,500.
‘Businesses should plan for pay rises for employees for 2025 and beyond. Employers should also review their benefit offering to ensure that they are getting value-for-money in light of this increase to the overall cost of the provision of benefits.
‘The structure of benefits should also be reviewed to ensure that exemptions that are available, from both income tax and NIC, are being captured.
‘An opportunity may arise for employers to offset some of this cost through the use of a salary sacrifice pension scheme including bonus sacrifice where not already in place.’
Without doubt the increase will have widespread implications for businesses, affecting employment, pay rounds and investment decisions.
Nicola Campbell, a partner at Azets, said: ‘For small businesses, the NI increase represents an additional cost burden at a time when many are already grappling with the effects of a 6% rise in corporation tax just 18 months ago.
‘The knock-on effects of this increase will be felt by workers, with businesses facing difficult decisions to offset rising employment costs.
‘For companies with significant wage bills, the additional cost may lead them to reconsider creating new roles. For example, a company with a £1m payroll will face an additional cost of £20,000.
‘Employers who had budgeted for a 4% rise in labour costs may feel compelled to reduce planned salary increases, affecting employees’ earnings potential.
‘While the government maintains that the NI increase won’t directly impact employees, the reality is that these additional costs will inevitably influence business decisions – and these choices will likely trickle down to the workforce.’
The NI increase comes after an inflation busting increase of 6.7% in the national living wage from April 2026.
Graeme Hills, head of tax at Duncan & Toplis, said: ‘The Budget isn’t disastrous, but let’s be frank – it isn’t good news.
‘With the national minimum wage increasing to over £23,000 annually, employers’ National Insurance contributions increasing to 15% while the secondary threshold for employer NI is almost halved to £5,000, finance departments across the country face an enormous administrative challenge.
‘This means that the nation’s biggest line of expenditure has just increased – and will inevitably mean that some businesses must think hard about how many employees they can afford.’
Russell Nathan, partner at HW Fisher said: ‘Most businesses will probably raise prices to cover the increase and the Bank of England expects this to be the case as they are forecasting inflation to rise from its current 2% to around 3%.
‘This will mean interest rates will remain higher for longer so those companies with high debt levels who were hoping interest rates were coming down quicker will be particularly disappointed.
‘Businesses with high employee levels and low margins such as restaurants will be hit hard as there is a triple whammy as employee costs will rise, business rates relief for the sector has been cut from 75% to 40% and the minimum wage is increasing by 6.6%. This is on top of the recent changes to the service charge rules which have impacted restaurants.
‘The increase is particularly harsh on the care sector where the ratio of carers to residents is very high. I am a trustee of a large care home charity and the increase has added hundreds of thousands to the payroll. This sector should have been excluded from the rise or at the very least been provided with a relief.
‘Even though the 1.2% may not seem a lot, what the rise does is concentrate the minds of the owners of businesses to improve profits and this will result in the medium to long term with the unemployment rate increasing and wage growth slowing as ultimately the workers will end up bearing the brunt of this increase.’
For some companies there is the risk is dropping into the £90,000 VAT threshold due to additional costs.
Neil Allcroft, tax director at HB&O, added: ‘For SME micro-businesses, the increase in the employer allowance may mitigate the pressures brought about by the increase in the rate of employer National Insurance contributions and the lowering of the starting points at which employer’s NI is charged – which will be a double hit for many businesses.
‘If a business is floating around the VAT registration-threshold, for example in the service sectors, they will see their costs increase by virtue of the additional NI cost and increased minimum wage obligations.
‘If this cost is passed onto customers, the resultant increase in gross turnover could exceed the VAT registration threshold, resulting in them being less competitive. The lowering of the NI threshold alone could be a cost of up to £600 per employee.’
On national minimum wage, compliance rules are complicated and there are severe penalties for failure to comply.
Simpson added: ‘Increasing the National Living Wage to £12.21 compounds the impact of the increase in the employer NIC rate for employees receiving a pay rise as a result of the change. NMW compliance is more complicated than simply paying the headline rate.
‘There are a number of complications and technicalities which can cause employers to fall foul of the legislation and potentially be ‘named and shamed’. There is currently a significant amount of HMRC compliance activity in this area, so businesses should take advice to ensure they are prepared for the changes.’
Budget 2024: employers national insurance up 1.2% | 30 Oct 2024
National living wage to rise by 6.7% | 29 Oct 2024
