Increase in employer National Insurance contribution rate

What does this mean for your employer clients?

At first glance this would appear to create additional NI cost for all employers. However, the government are more than doubling the existing relief by increasing the Employment Allowance from £5,000 to £10,500 as well as removing the £100,000 threshold, expanding this to all eligible employers.

This has two significant benefits. To begin with, it means employers won’t need to pay the first £10,500 of employer NI contributions for which they would otherwise have been liable. In addition, rather than this only being applicable to businesses where the total annual NI bill was below £100,000, it will now also be available to businesses with annual NI liabilities above this level. This will result in some employers paying less NI post April 2025, some the same and others seeing an increase.

How to lessen the blow

Even with the expanded employment allowance, many employers will still see an increase in their overall NI bill, making pension contributions a more attractive form of remuneration, especially via salary exchange. 

Employers don’t pay national insurance on employee’s pension contributions and if they use salary exchange, there’s a contractual agreement to reduce an employee’s headline salary. This saves both employee and employer national insurance on the salary no longer paid to the employee. The employer then pays both their own, and the employee’s pension contribution, as an employer pension contribution. There are a few ways the employer pension contribution can be structured but it’s quite common for all the employee NI savings (from not being paid a portion of their salary) to be redirected into the pension plan, and some or all of the employer’s NI saving too.

What does it mean for employees?

Increasing employees’ pension savings could help improve recruitment and retention. This may help shift the conversation with employees solely on headline salary, to considering the total remuneration package. This is especially true if some of the employer national insurance saving is used to provide employee benefits, whether they be additional pension or some other form of benefit, such as group income or critical illness cover.

Alternatively, employers could retain these savings within the business to offset some of the impact of the increase in employer national insurance cost of the non-exchanged element of salary. It doesn’t need to be an all or nothing decision and employers could use a combination of options, perhaps passing a percentage of the employer NI savings on to the employee and retaining the remainder within the business.  Whichever option is used, paying pension contributions via salary exchange could mitigate some of the impact of the employer NI increase coming in April 2025.  

Points to consider

It’s important to note that salary exchange won’t be right for all employees, and it isn’t possible to exchange salary below minimum wage, or below the threshold for automatic enrolment. It’s also important to remember that the employee’s headline salary will be lower post exchange which could impact on their ability to borrow. Employers should also speak with their payroll provider prior to deciding on a particular structure for the salary exchange arrangement, to ensure the payroll system can facilitate that structure. As it’s a change of contract of employment, employers will likely need to take legal advice. This one-off cost may still be palatable given the ongoing benefits salary exchange can bring.

The employer national insurance increase will likely be a concern for employers, and some will incur additional costs as a result, but with focused planning, it will be possible for advisers to help mitigate some of this additional cost.