What’s the impact of increased employer NI contributions for small businesses

The announcement in the autumn budget—the first delivered by Chancellor Rachel Reeves—that received the most coverage was probably the increase to employer National Insurance Contributions (NICs).

The rate of employer Class 1 National Insurance contribution rates are increasing from 13.8% to 15%. What’s more, the per-employee threshold (also known as the Secondary Threshold) at which employers become liable to pay NI is falling from £9,100 to £5,000 per year.

But what impact will this have on small businesses?

The cost of an employee is going up

From April 2025, the cost of an employee is going to go up, but the exact cost will depend on employee salary. Let’s take a look at an example.

Currently, an employer pays 13.8% on employee earnings above £9,100 per year. For a worker earning £30,000 per year, that equates to a yearly tax bill of £2,884.20 in employer NICs.

From April, this would increase to £3,700 for the same employee, thanks to a combination of the rate increase and the reduction in Secondary Threshold.

Extension of the Employment Allowance

Although the cost of employees earning more than £5,000 per year is increasing, there was some relief for small businesses, with the Employment Allowance—which allows eligible businesses to reduce their annual NI liability—increasing from £5,000 to £10,500.

Currently, businesses and charities with an employers’ Class 1 National Insurance liability of below £100,000 in the previous tax year are eligible for the Employment Allowance, but this threshold is also being removed as of April next year.

What might this mean?

The increasing costs for employers next year—which aren’t limited to employer NICs, with a rise in the minimum wage and expiration of the 75% business rates discount also on the way—mean businesses may have to adapt and find money elsewhere, whether that’s in the form of price rises for consumers, or by putting hiring and pay increase plans on ice.

How salary sacrifice schemes reduce NI contributions

Salary sacrifice schemes can be an effective tool for UK businesses looking to reduce their National Insurance (NI) liabilities. 

Under these arrangements, an employee agrees to forgo a portion of their gross salary in exchange for non-cash benefits, such as pension contributions, cycle-to-work schemes or childcare vouchers. These benefits are often exempt from National Insurance Contributions (NICs). 

For employers, this reduces Class 1 employer NICs, currently set at 13.8% of an employee’s gross salary above the NI threshold. For example, if an employee sacrifices £5,000 of their annual salary for pension contributions, the employer saves £750 in NI (following the increase in April). 

However, businesses must ensure these arrangements comply with HMRC regulations. Some benefits may not qualify, so careful planning is needed to maximise savings while remaining compliant and maintaining fairness to employees.

To make sure you’re taking advantage of all the tax efficiencies available to your business, speak to our small business accounting experts. We offer a wide range of services for SMEs across every sector, including advice on bookkeeping, advice on tax-efficient share structures and assistance with VAT and PAYE filing.

To find out more about how we could help you, book a free small business accounting consultation, or get in touch.