Practical steps to respond to the national insurance changes in the Budget

The most significant individual tax measure announced in the recent Budget was the changes to National Insurance Contributions (NICs), which are estimated to generate £25 billion annually for the Treasury. 

The changes can be summarised as the threshold at which an employer begins paying NICs reducing from £9,100 to £5,000 per annum, and the rate increasing from 13.8% to 15%. This increased NIC rate will also apply to taxable benefits-in-kind and PAYE Settlement Agreements. 

However, employers with NIC costs more than £100,000 will now be able to claim the increased Employment Allowance of up to £10,500, subject to other exemptions including single-director companies.  

This article outlines some practical steps employers can take to reduce their exposure to increased NICs. 

Owner-Managed Companies 

For director-shareholders of owner-managed companies, it is typical to take a modest salary from the company (usually between £9,100 and £12,570 in 2024/25, depending on the circumstances) and take further profits from the company in the form of dividends. 

With the reduced employer NIC threshold from 6 April 2025, many owners may consider reducing their salary to reduce the extra NICs costs. However, it is important to note that taking a salary from the company may have non-tax benefits. 

Reducing the salary to the new employer NIC threshold of £5,000 would mean that the individual would not qualify for their state pension credits.  For 2025/26, a salary of at least £6,500 would be needed for this purpose resulting in employer NICs of £225, before any Corporation Tax relief. 

Owners should consider their entire remuneration package to ensure it aids in achieving their objectives in the most tax-efficient manner. Options other than dividends and salaries should be considered. 

• Employer pension contributions of up to £60,000, subject to their total earnings, are still very attractive from a tax perspective, as the contribution is an exempt benefit for the director and the company should be able to claim Corporation Tax relief on the payment. Further amounts could be payable where brought forward allowances are available.

• For those looking to acquire a new electric vehicle, a company car remains an attractive option. The company will receive a 100% ‘First Year Allowance’, reducing taxable profits by the cost of the car, and the taxable benefit remains at 2% of the list price until the 2027/28 tax year. However, the increased rate of Employer NICs will unfortunately apply to the benefit. This is especially the case with the reclassification to the tax position for a company and individual on a ‘double cab pickup’ trucks. 

• Trivial benefits of up to £300 per year can still be provided to directors if each benefit costs the company less than £50, is not in the form of cash or a cash voucher, is not a reward for work performance, and is a non-contractual benefit. A trivial benefit does not attract any Income Tax, NICs, or reporting requirements.

Employers

Although the Employment Allowance will increase by £5,500, the uplift in the National Minimum Wage and the increase in the employer NIC rate will bring a significant rise in costs for employers. There are still various ways to incentivise employees without paying extra employer NICs. 

The increase in the employer NIC rate makes salary sacrifice arrangements even more attractive for employers as part of their overall remuneration packages for employees. Common examples of salary sacrifice arrangements include pension contributions, cycle-to-work schemes, and electric vehicles. 

For example, replacing an employee’s cash bonus with an employer’s pension contribution will bring a 15% cost saving to the employer. This will require the agreement of the employee in question, and some employers agree to share the Employer NIC cost saving with the employee to incentivise this. 

Share schemes are often an effective tool in encouraging employee retention and attracting high-performing individuals. Employers can consider setting up tax-advantaged share schemes to incentivise their employees instead of cash bonuses. In particular, the Enterprise Management Incentive (EMI) is a popular share option scheme as it allows employers to target specific employees and, in general, the growth in value of the shares on which options are granted is free from Income Tax and NICs. 

Where employers pay discretionary bonuses, it may be worth considering whether these should be paid before the new rates come into effect. This can help avoid the higher NICs associated with the increased rates. 

Summary

Whilst it is inevitable that most businesses will be affected by the changes to employer NICs, there are strategies available to ensure profits are extracted and employees are remunerated in a tax-efficient manner.

Every business is different and will need to use a range of strategies to ensure that they are operating effectively. In practice this can be complex, and we would be happy to speak to you about how the changes affect your business and what can be done to optimise your position.