From April 6, 2025, businesses across the UK will see an increase in the cost of employment as the rate of employer National Insurance contributions (NICs) rises from 13.8 per cent to 15 per cent.
Alongside this, the earnings threshold at which employer NICs apply will drop significantly from £9,100 to £5,000 per year.
For business owners and finance leaders, this change is a fundamental shift in employer cost structures that demands a strategic response.
What is the financial impact?
The increase in employer NICs effectively means that businesses will be paying a higher tax burden per employee.
For example, under the current system:
- An employee earning £35,000 per year incurs an employer NIC bill of £3,574
- Under the new system, this will rise to £4,500 – an increase of £926 per employee.
For businesses with large workforces, the cumulative impact could be substantial, making it essential to review how remuneration is structured to mitigate rising costs.
Strategies to manage increased employer NICs
A one-size-fits-all approach will not work when tackling rising NIC costs.
Instead, you should consider tailored solutions that align with your commercial goals, workforce composition, and long-term financial planning.
1. Salary sacrifice schemes
Salary sacrifice arrangements allow employees to exchange part of their salary for non-cash benefits, which can result in savings on both Income Tax and NICs for employers and employees alike.
Some tax-efficient options include:
- Pension contributions
- Cycle-to-work schemes
- Electric vehicle (EV) salary sacrifice schemes
While these arrangements have specific compliance requirements, they can be a valuable tool in offsetting some of the rising employment costs.
2. Incentivising through dividends
For owner-managed businesses structured as limited companies, dividends remain a tax-efficient way to extract profits.
Unlike salaries, dividends are not subject to NICs, meaning business owners can reduce the impact of increased NIC costs by reviewing their salary-to-dividend split.
However, with the recent reduction in the dividend allowance, care must be taken to ensure tax efficiency.
The right mix will depend on the individual’s tax position and long-term goals.
3. Restructuring bonus payments
Traditional cash bonuses are subject to both Income Tax and NICs, making them an expensive way to reward staff.
To counter rising NIC costs, you might consider:
- Performance-linked pension contributions
- Share schemes such as Enterprise Management Incentives (EMIs)
- Tax-efficient benefits that offer real value to employees while reducing employer NIC liabilities
Before proceeding with these options, however, discuss the issue with your adviser.
4. Reviewing workforce structure
As businesses navigate changing economic pressures, it may be worth exploring ways to optimise workforce structure while maintaining a strong and engaged team.
Rather than turning to redundancies, businesses can consider alternative approaches, such as:
- Outsourcing non-core functions where it enhances efficiency
- Engaging freelancers and consultants where appropriate and in line with IR35 regulations
- Revisiting part-time and flexible working arrangements to support both business needs and employee preferences
With rising employment costs, taking a strategic approach to workforce planning can help ensure long-term sustainability while continuing to invest in talent.
5. Making the most of Employment Allowance
Eligible businesses can currently claim up to £5,000 per year in Employment Allowance to reduce their National Insurance contributions (NICs).
From 6 April 2025, this threshold will increase to £10,500.
For some small employers, this boost may help offset rising NIC costs, reducing the impact of higher rates.
If your business is not already making full use of this allowance, it should be factored into your broader remuneration strategy to maximise cost efficiencies.
My advice
The upcoming NICs increase is not an isolated issue – it is part of a broader trend of rising employment costs.
While many employers will look to manage this through pricing strategies or cost efficiencies, reviewing remuneration structures can also play a role in mitigating the impact.
My advice? Speak with your accountant or tax adviser as soon as possible to explore the most tax-efficient way to structure remuneration for your business.
A tailored plan will help you manage costs while continuing to attract and retain top talent in an increasingly competitive landscape.
