Budget October 2024 – Possible effects of Employers National Insurance Increase.

Since the Budget, we have read many debates on arguably one of the most talked about tax policy changes since the new government took office–the employer NIC increase.

The changes taking place from April 2025 are:

A.     Increase from 13.8% to 15%.

B.     The starting point when an employer is liable to pay Employers’ NI  has now been reduced from £9,100 to £5,000.

C.      Increase to Employer Allowance- from £5,000 to £10,000.

D.      Removal of restrictions as to when Employer's Allowance can be claimed.

We wanted to discuss the effects on businesses and charity organisations as we see it.

Increase in Employers National Insurance Contributions from 13.8% to 15%

For smaller businesses or those with a less labour-intensive workforce, the effects will be negligible, but they could benefit – when coupled with the increase in Employer Allowance- please see below:

Larger, more labour-intensive employers, including those in the care sector, retailers and hospitality, are going to be impacted by a significant increase in Employment costs and will have to consider how to mitigate the effects across the business.

The starting point reduction means employers are liable to pay national insurance.

No matter the size of the business, this is going to increase the amount of national insurance an employer pays if they do not elect to claim an employer's allowance.

Increase to Employers Allowance.

Businesses will be able to offset more of their liability for employers' national insurance with the increase from £5,000 to £10,000.

Removal of Restrictions for Claiming Employers Allowance.

No matter the size of the company, they can now claim Employers Allowance. The only restriction is that for group entities that run multiple payrolls, employers' allowance can only be claimed once, so care must be taken.

Claiming employer allowance must be completed via routine RTI submissions; each business must complete an annual declaration, including some supporting data. The declaration details have yet to be confirmed when they will start.

The above changes will hit Charity or 3RD Sector Organisations hard, as these organisations do not have monthly income receipts but rely on donations and grants and may struggle to raise additional donations to offset the increases. Grants generally will not increase to cover these costs.

Based on the above there will be an adverse effect on most businesses, we try to outline some below:

Business Growth Plans:

Growth, as a whole, could be stifled for both small and large businesses – as any growth normally will result in a larger workforce, which will mean an increase in employers' national insurance liability.

Prices of Services/or products:

To mitigate the increased costs, some businesses will consider increasing the costs of either services/or products. Key considerations will be the elasticity of demand and whether the market can support any increases.

Review of Overheads and Employment costs:

Businesses will review overall costs incurred by the business as an instrument to mitigate the overall costs of these budget increases. Specific areas which have the potential to be reviewed  are:

·        Labour workforce and their efficiencies- is there a case to restructure departments and reduce the workforce?

·        Staff Bonuses – Reducing the company's liability for Staff Bonuses or putting a freeze on bonuses?

·        Payrises- Putting a freeze on pay rises and/or limiting any salary increases made available to staff.

·        Reducing Man hours in labour-intensive departments by use of technology or offshoring key roles.

·        Engaging more freelancing consultants for key roles and departments.

It is very important that a business makes the right choice. Mistakes such as increasing prices of products and services when the elasticity of demand does not support the increase will be costly and affect the business's profitability. Other changes, such as pay freezes or reducing the workforce, can have detrimental effects on the workforce and thus impact the business as a whole.

With the increase in employers' NIC, many businesses may realign their business model to use more freelance consultants to avoid incurring additional costs and reducing their profitability. Genuine freelancers can be paid a fee and pay themselves primarily through dividends and avoid any employer NIC liability.

There are other effects from a tax and governance perspective that have to be considered if using Freelance consultants instead of a traditional workforce.

However, there are deeper considerations, as all employers using freelancers must assess the status of any freelancers. If they are deemed employees for tax purposes is subjective and it is very easy for mistakes to be made due to the wide range of factors which need consideration and can evolve overtime.

Tools provided by HMRC to helps assessment in themselves can be inaccurate and result in inconclusive rulings.

Any incorrect assessments can result in HMRC  pursuing a business for missing PAYE and NICs rather than the freelancer, which will also mean incurring penalties and interest charges.

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Why not book a consultation with us to see how we can meet your business needs- allowing you to concentrate on growing your business. Email Info@stanton-accountancy.com to book your consultation.