Chancellor Rachel Reeves and Exchequer Secretary James Murray MP addressed parliament for the second reading of the National Insurance contributions bill on December 4. Here’s some info on who the change will affect, and how.
How is National Insurance changing?
The government are planning to raise the contributions employers make towards National Insurance.
Firstly, they are reducing the untaxed threshold. Currently, employers don’t pay National Insurance on the first £9,100 each employee earns each year. In 2025, that will reduce to £5,000.
Secondly, they will increase the rate. Currently, employers pay 13.8% on each employee’s gross salary above the threshold. In 2025, that will increase to 15%.
The lower threshold and higher rate means that employer NI contribution will rise for every employee. Here’s what the changes would do to a range of salaries.
To ease the impact of the new higher NI bill on small businesses, the Government will increase the annual allowance. Currently, small businesses can claim a £5,000 allowance – effectively a discount off their tax bill. Under the new rules, all businesses will have access to a £10,500 allowance. For small businesses, this new, larger allowance will cancel out the impact of the rate increase. For larger companies, it will make little difference.
Altogether, the three changes to Employers National Insurance contribution means that for most businesses, employing staff will become more expensive. Here’s how the change will affect a few different types of business, in percentage.
For these examples, we’ve used hypothetical business cases, based on typical types of business in London.
The only businesses that will see their tax bill decrease following the change to NI are businesses with a small payroll and low salaries, like the independent cafe and large pub. These businesses have small enough NI bills that the new £10,500 allowance (compared to the existing £5,000 allowance) means they actually save money.
However, for businesses with more than about 10 employees or with high salaries, the change to NI will make hiring more expensive.
Who will be affected?
All businesses with large payrolls will see their tax bill increase, but industries with a high staff-to-output ratio will find the tax increase the toughest to bear. This chart shows how many people are employed in each industry, compared to the output of the industry. The industries in red are likely to be hit hardest by the tax change.
The industries in red need a lot of staff to operate, relative to the output of the business. That means they have less 'wiggle room' when budgeting for employees, as this chart shows:
How much will the tax hike raise?
This tax hike will be the single biggest revenue raiser of Labour's autumn budget. The government expects that it will bring in an extra £20 billion a year. However, economists say that once behaviour change is taken into account, it's likely to bring in more like £10 billion.
