Last year’s autumn budget dropped a couple of bombshells for small businesses, most notably around increases to National Insurance Contributions.
Given the financial impact these changes will have, it’s important to understand how they will affect your business and to have a strategy in place to budget for them, sooner rather than later.
This month we look at how you can mitigate against these increases, but first, let’s discuss what those changes are and the impact they will have on small businesses.
What are the key changes to National Insurance?
From 6th April 2025:
- National Insurance rates will increase by 1.2% rising from 13.8% to 15%. This applies to Class 1, Class 1A and Class 2 contributions.
- The Employer NICs secondary threshold is being reduced, so employers will now start paying NI on employee earnings over £5,000 rather than £9,100.
But what does this mean?
Simply put, you will be paying more for each person you employ. This is further exacerbated by increases to both the National Living Wage and National Minimum wage.
To put that into context, according to the Centre for Policy Studies, a employer will have to pay £2,583 in NICs for each full-time employee on minimum wage. This is a whopping increase of £966 compared to the £1,617 an employer would have paid in 2024.
Inevitably, this is going to have a massive financial impact on businesses who hire low-paid workers, and most businesses will experience higher payroll costs which will have repercussions for their cashflow and profits.
So, how can you mitigate against these rising costs?
These changes affect employers at all levels making it crucial to decide how you are going to prepare your business for these increased costs. The good news is there are a number of actions you can take.
1. Find out if you can claim Employment Allowance
To help offset these increased costs, the government has also made changes to the Employment Allowance, which allows eligible employers to reduce their annual National Insurance liability
From 6 April 2025:
- The allowance is increasing from £5,000 to £10,500 per tax year
- The cap, which meant employers who incurred a secondary Class 1 NI liability of more than £100,000 couldn’t claim, is being completely removed.
Although, more employers than ever will be able to claim Employment Allowance, there are still some significant exceptions. Companies who aren’t eligible include:
- Any business who is doing more than half its work in the public sector, such as local councils. This excludes charities.
- Companies who have a sole director and that person is the only employee liable for secondary Class 1 NICs.
Employment Allowance isn’t something that is automatically applied, so it’s worth checking to see if you are eligible.
For those of you who are eligible, you can claim Employment Allowance any time during the tax year as part of your PAYE submission process.
If you need any more information on Employment Allowance or need help working out if you are eligible, just get in touch.
2. Review your recruitment strategy
As the changes in NI mean more employees will become eligible to pay NICs, then reducing the number of people you employ is a serious consideration. That doesn’t necessarily mean just letting people go but also freezing hiring or using as many self-employed people as possible. Ultimately, the fewer people you employ, the less tax you pay.
If reducing your headcount isn’t a viable option, you could also consider reducing the number of hours staff work or ask if anyone wants to go part-time as this will also help reduce your overall tax bill.
3. Reduce spending
Making changes to how many people you employ could turn out to be a false economy, especially if you want to grow your business, so it might be worth reviewing your overall spending to see if anything could be cut.
Do you have any business subscriptions you never use? Can you hold more meetings online rather than incurring travel expenses? Is it worth reviewing your supplier contracts to see if you can get better deals?
You could even look at whether it would be feasible for more people to work at home, so you could downsize your workplace.
4. Consider outsourcing functions
We’ve talked before about the advantages of outsourcing, especially if you are just starting out in business, but the changes coming in April 2025 does mean outsourcing could offer a lifeline for lots of businesses.
As well as helping reduce the overall costs associated with hiring a member of staff, such as training, equipment, holiday pay and sick pay, outsourcing allows you to just hire people for specific projects and, of course, gives you the flexibility to terminate the contract at any time.
Not only does this give you a lot more control over how much you spend, but also potentially gives you some valuable insight into whether a particular job role is actually a nice-to-have or a necessity for business success. Areas you could consider outsourcing include payroll, bookkeeping, HR and marketing.
5. Introduce salary sacrifice schemes
Salary sacrifice schemes are bit of a win-win for both employees and employers. By giving up some of their salary employees receive a benefit, such as workplace pensions, childcare vouchers or vocational training. And as their salary is reduced by the amount of their sacrifice, employers pay less NI.
If you have salary sacrifice schemes in place, consider enhancing what you already offer, and if you don’t currently have any, it’s well worth introducing some. We’ll be happy to help get you started.
Hopefully this will have given you some ideas around what you can do to mitigate the increased cost of employing people when the changes come into effect in April.
Next month, we will take a special look at the impact these changes will have on sole directors of limited companies and how they can maximise their earnings and minimise their tax bill.
