Changes to National Insurance contributions and Employment Allowance: key impacts for UK employers

Starting 6 April 2025, several significant changes to the UK’s National Insurance contributions (NICs) and Employment Allowance will impact employers. These changes are part of a broader government initiative aimed at stabilizing public finances and ensuring more funds are directed towards public services, especially the NHS. This article breaks down what these changes mean for businesses with employees in the UK, and offers insight into how to navigate these updates to stay compliant and make the most of the new benefits.

Understanding the changes to National Insurance contributions

New Secondary Threshold for National Insurance

From 6 April 2025, the Secondary Threshold for Class 1 National Insurance Contributions will decrease from £9,100 to £5,000. This change means that employers will have to pay NICs on a larger portion of employee earnings at the secondary rate.

The Secondary Threshold represents the minimum salary at which an employer must pay National Insurance on behalf of an employee. Lowering this threshold affects employers’ payroll costs, making it essential to plan for increased contributions.

Changes to Class 1 NICs rate

Alongside the threshold change, the secondary Class 1 NICs rate will increase from 13.8% to 15%. This means employers will face higher NICs costs for employees earning above the new secondary threshold. The combination of a lower threshold and higher NICs rate may lead to a notable rise in overall employment costs for businesses, particularly those with higher-paying employees.

These changes will apply to all employers, but businesses with employees earning close to the threshold may feel the impact more acutely. It’s important to monitor how these adjustments will affect your payroll budget and employee compensation plans.

Impact on employers 

Who is affected? 

The changes will impact all employers in the UK, but the degree of impact will vary depending on the size of the business and the structure of its workforce. Small and medium-sized enterprises (SMEs) may feel the pinch more, as they may have a higher percentage of employees earning near the new secondary threshold.

Financial implications for businesses

The new secondary threshold and the NICs rate increase will lead to higher employer costs in terms of NICs. For companies with many lower-wage employees, the reduction in the threshold may mean more employees are subject to employer NICs, which were previously exempt.

Employers should prepare for these changes by revising their payroll systems and forecasting potential increases in payroll expenses. Budgeting for these additional costs ahead of time can help businesses manage the financial impact and stay compliant with the new legislation.

Employment Allowance updates

Increased Employment Allowance

The Employment Allowance (EA), which helps small businesses offset some of their employer NICs costs, will increase from £5,000 to £10,500. This change aims to provide more relief to small businesses, allowing them to offset more of their National Insurance liabilities.

Eligibility for Employment Allowance 

Another significant update is the removal of the £100,000 cap on companies claiming the Employment Allowance. Previously, businesses with a payroll over £100,000 could not claim the EA. Now, this cap is lifted, making more companies eligible for this relief.

For multinational companies with employees in the UK, this increase in the Employment Allowance can provide some financial respite, particularly if you operate in a sector with many lower-wage employees. Businesses should review their eligibility and ensure they are taking full advantage of this update.

Government’s objectives and rationale 

Public service funding and financial stability

The government has justified these changes as a necessary step towards strengthening public finances, particularly to fund key services like the NHS. The increase in NICs revenue will contribute to these services, while also ensuring the sustainability of the national insurance system.

From the perspective of multinational companies, this means that the changes are part of a broader fiscal policy aimed at ensuring long-term financial stability for the UK, even as businesses face new challenges.

Key takeaways

• The Secondary Threshold for NICs will decrease from £9,100 to £5,000 starting in April 2025
• The secondary Class 1 NICs rate will increase from 13.8% to 15%
• The Employment Allowance will rise to £10,500, with no cap on eligibility
• Small businesses and multinational employers with UK employees will be most affected by the NICs rate and threshold changes
• Long-term fiscal stability and increased funding for public services like the NHS are central to the rationale behind these changes

FAQs

1. How will the changes to National Insurance affect my business?

The changes to NICs will likely increase your payroll costs, as both the secondary threshold for NICs is lowered, and the NICs rate increases. Businesses should prepare for these higher contributions by adjusting their budget and payroll systems.

2. Who is eligible for the increased Employment Allowance?

Starting in 2025, businesses of all sizes, including those with payrolls over £100,000, can now claim the Employment Allowance. This means many businesses that were previously ineligible may now benefit.

3. What is the rationale behind reducing the Secondary Threshold?

The government aims to increase revenue for public services, particularly the NHS, and ensure financial stability by adjusting National Insurance thresholds and rates.

4. How can multinational companies prepare for these changes?

Multinational companies should update their payroll systems, forecast higher NICs costs, and ensure they’re taking full advantage of the increased Employment Allowance, especially if they employ a significant number of lower-wage workers in the UK.

5. Will there be any future changes to National Insurance contributions?

While future changes are not yet announced, it’s important for employers to stay informed through official government channels and regularly review fiscal policies that could affect business costs in the UK.