Measure
The Chancellor has today announced that the standard rate of employer national insurance contributions (NICs) will be increasing from 13.8% to 15.0% with effect from 6 April 2025. The increase will also apply to Class 1A (paid on benefits in kind and certain termination payments) and Class 1B (payable on PAYE Settlement Agreements). From the same date, the earnings level at which employers start paying the charge (secondary threshold) will be lowered from £9,100 to £5,000.
For an employee on UK average earnings of £36,036, the combined effect of the two measures will be an increase of 25% in employer contributions from £3,715 for 2024-25 to £4,655 for 2025-26.
The change will have a higher impact for employers in low-wage sectors such as hospitality, retail, leisure or care. For example, for an employee earning £20,000 pa, employer contributions will increase by 50% from £1,504 for 2024-25 to £2,250 for 2025-26. For employers in high-wage sectors, the effect will be less pronounced. For example, for an employee earning £100,000 pa, employer NICs will increase by 14% from £12,544 for 2024-25 to £14,250 for 2025-26. For small businesses, the increase in the Employment Allowance from £5,000 to £10,500 will help reduce the negative impact of the changes.
Employers will still be able to make use of a variety of NIC exemptions, for example when employing under-21-year-olds, young apprentices, veterans or hiring new employees in a Freeport or Investment Zone special tax site. For employers operating share award schemes, the ability to transfer the cost of employer NICs to employee will also remain in place.
The increase in the employer’s NIC rate and the lower secondary threshold will take effect from 6 April 2025.
Some employers are likely to react to the increase in the cost of employing staff by offering lower pay increases in future years. However, employers in low-wage sectors have less scope to defray the increased costs of employment in this way, especially if a large part of their employee population is paid at National Minimum Wage rates, where annual wage increases are statutory. Businesses in low-wage sectors who are unable to absorb the higher costs will come under pressure, especially if they are unable to increase prices to maintain profitability.
In an international context, the UK’s employer social security rates and average labour costs remain competitive, especially when compared to the other European G7 economies of France, Germany and Italy. However, the UK’s labour productivity remains the lowest amongst these countries. Given that these measures will increase the cost of employing staff in the UK, addressing the challenges of low productivity becomes ever more important.
A key difference of the UK social security system is that employer contributions are uncapped, whereas some other European countries apply a cap. This means that a rate increase will have a more significant impact in the UK for high-wage sectors such as financial services.