Chancellor Rachel Reeves announced the biggest rise in employer National Insurance contributions (Image: Getty)
A huge hike in employers’ National Insurance contributions could lead to employees having to take a pay cut.
The rise was Rachel Reeves’ biggest single tax hike among the £40bn in last month’s Budget and is the biggest ever rise in employer National Insurance Contributions (NIC).
The rate comes into force on April 6, 2025, and will increase from 13.8% to 15%, while the earnings threshold at which it kicks in – so when employers will be forced to pay it – will be slashed from £9,100 to £5,000.
The move will raise an estimated £25.5billion a year but has been slammed by UK businesses.
Small companies will get some protection, as the Employment Allowance is going up from £5,000 to £10,500 and removing the £100,000 threshold, which means that 865,000 employers will pay no NICs next year, according to the Treasury.
Gary Smith, partner in financial planning and retirement specialist at wealth management firm Evelyn Partners, said the NIC rise is likely to have a knock-on effect on hiring and remuneration plans, and could hit job creation and real wage increases.
However, there might be a silver lining for both employees and employers.
Mr Smith said more employers may encourage their staff to opt for a pension tax break known as ‘salary sacrifice’.
This means an employee is effectively taking a pay cut to pay more of their salary into their pension.
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Mr Smith said that this would mean employers could get around the NIC hike.
He explained that an employee who paid more into their pension could avoid their salary falling into another tax bracket, such as the 40% higher rate of taxation at £50,270.
Employers can also benefit because pension contributions are not subject to income tax or NICs, so their taxable salary is reduced.
“Pension contributions via salary sacrifice pensions are a tax-efficient way for employees to pay into a pension scheme and also an attractive option or employers to reduce their NI costs.”
“Salary sacrifice can be a win-win option for both employees and employers, helping employees increase their take-home pay and help employers lower their NICs. However, despite the financial benefits to both the employer and employee, many organisations still do not operate a salary sacrifice arrangement. These employers could look towards salary sacrifice pension schemes to reduce costs.”
How does salary sacrifice work?
Say an employer currently has a workplace pension scheme set up that is not written on a salary sacrifice basis.
This means the employer would currently pay NI on the full salary of each employee above the lower threshold. Let’s say the wage bill was £1m above the lower level, this would make the employer NI bill currently £138,000, now increasing to £150,000 when the NI rate goes up to 15 per cent.
On a normal workplace pension scheme the employees would pay 5% of salary into the pension, which would be £50k in this example. If the employer converted the scheme to salary sacrifice, this would reduce the wage bill to £950,000 and the NI would reduce to £142,500, a saving to the employer of £7,500.