Will the increase in employer national insurance in the budget affect your wages? We explain what it means

The Chancellor delivered her biggest ever Budget tax increase in the form of an increase in employers’ national insurance contributions.

The long-awaited Autumn Budget increase will see businesses pay more into their employees’ pensions, rising from 13.8 per cent to 15 per cent, raising £25 billion a year.

The threshold at which employer national insurance is charged has also been reduced from £9,100 to £5,000 a year. The changes will take effect in April 2025.

The Labor Party repeatedly said it would not raise taxes on workers, but businesses have warned the move could have detrimental effects on jobs and wages.

Why is the Chancellor raising employers’ NICs?

Rachel Reeves’ first budget placed much of the blame on the previous Conservative government for leaving the public finances in a dire state.

He had previously said he would need to raise taxes to plug the alleged “£22bn black hole” in the public finances.

However, Labour’s manifesto ruled out increases in income tax, national insurance and VAT, leaving it little to play with.

It means Reeves had to look elsewhere for tax increases. In theory, increasing employers’ NICs does not directly affect employees because their take-home pay remains the same. Instead, it is the employers who have to take the hit.

However, an increase in the NI for employers has been called an “employment tax” and could continue to affect the already waning trust in the Government.

Some companies have already warned that they will have to pause hiring, salary increases and pension contributions.

Will the employer’s NI increase affect take-home pay?

Increasing employers’ national insurance contributions does not directly affect pay packages, but will create a potential drag on earnings.

Currently, employers pay NI at 13.8 per cent on a worker’s earnings over £9,100 a year, but in April 2025, this will change to 15 per cent on earnings over £5,000.

The increase, along with a reduction in the secondary threshold (the point at which NICs are paid), means business tax increases by a quarter for an employee earning £36,000, according to tax firm Blick Rothenberg.

The burden falls on companies, as Reeves reconfirmed his commitment to not take money out of workers’ pockets.

Employee NICs will remain at the same level of 8 per cent, down from 12 per cent last year, after former chancellor Jeremy Hunt cut them by 2p in his March budget, following a 2pm reduction. at the beginning of the year.

Although take-home pay is not affected, changes to employers’ NICs will almost certainly affect employees.

The changes to NICs coincide with the announcement that the minimum wage will rise to £12.21 for those aged 21 and over and £10 for those aged 18 to 20.

The additional costs act as a drag on future salary increases and bonuses for employees, as companies face additional costs.

Fiona Fernie, partner at Blick Rothenberg, says: ‘Rachel Reeves’ increase in employers’ NICs may not (technically) break the Government’s manifesto promises.

“However, it is also unlikely to foster business growth.

“In fact, the increased cost of hiring staff is likely to have a negative rather than a positive impact, whether in terms of reduced staff recruitment or lower wages, assuming employers follow the rules meticulously.”

The changes could also have an impact on pension contributions and other benefits, such as healthcare, as companies balance out higher costs. The government stopped short of adding employers’ NI to pensions, an idea that had been criticized by experts.

Helen Morrissey, head of superannuation analysis at Hargreaves Lansdown, adds: “The accumulation of additional costs for employers, coupled with a planned increase in the minimum wage, is likely to lead to lower pay rises in the long term.”

Morrissey said: ‘In the long term we need employers to increase their pension contributions beyond the auto-enrolment minimums, as the government tries to boost auto-enrolment.

“However, given the additional demands placed on employers by the increase in NICs.”

What about smaller companies?

Rachel Reeves attempted to soften the blow for smaller businesses by increasing the employment benefit from £5,000 to £10,500. This allows smaller businesses with fewer employees to reduce their NI liability.

He said this means 865,000 small employers will not face NI charges next year, explaining it was the equivalent of four full-time workers at the new national living wage.

Fall Budget Basics

How will increasing employer NICs affect the economy?

Reeves said he was delivering a budget for growth, but there is a risk that raising taxes on companies could backfire and suppress economic activity and deter international companies from investing in the UK.

It could also act as a disincentive for employers to hire new workers, especially young employees, meaning UK productivity could suffer.

Robert Salter, partner at Blick Rothenberg, said: “The increase in the national minimum wage for young adults, which will increase by 16.3 percent from April 2025, will simply make it increasingly unlikely for small businesses to invest in hiring younger and less experienced staff. .

“Therefore, realistically, this will result in an increasing number of NEETs, i.e. those without employment or education in training.”