The October 2024 Autumn Budget delivered a number of notable adjustments to payroll taxes, affecting businesses of all sizes. With changes such as increased National Insurance Contributions (NICs), reduced income thresholds, and a revised National Living Wage (NLW), it is vital employers fully understand the implications. The changes could have an impact on operating costs, employee income, and long-term planning.
KEY PAYROLL ANNOUNCEMENTS
- Employers’ Class 1 NIC Increase: Employers’ NIC rates have increased from 13.8% to 15%, effective from April 2025.
- Secondary Threshold Reduction: The threshold at which employers start paying NIC has been reduced from £9,100 to £5,000. This reduction means that employers will contribute NICs on earnings above £5,000, rather than the previous £9,100 threshold.
- Employment Allowance (EA) Increase: Starting in April 2025, the EA will increase from £5,000 to £10,500, allowing small businesses to offset some of their increased payroll costs. Additionally, the £100,000 cap on EA eligibility is being removed, making it accessible to all businesses regardless of their NIC contributions.
- National Living Wage (NLW) Increases:
- Age 21 and above: Increased by 6.7% to £12.21 per hour
- Ages 18–21: Increased by 16.3% to £10.00 per hour
- Ages 16–17 and Apprentices: Both increased by 18% to £7.55 per hour
These measures reflect the Government’s commitment to raising worker wages while increasing revenue through higher payroll taxes. However, these adjustments mean that many employers, especially those with mid- to low-income employees, will face higher payroll expenses.
INCREASED EMPLOYER NIC BURDEN
The jump from 13.8% to 15% in employer NICs, coupled with a lower secondary threshold, could drive up payroll costs significantly. Let’s consider an example to understand the impact:
For an employee earning £35,000 annually:
Current NIC Calculation:
Monthly NIC-able Pay = £2,158.67
NIC @ 13.8% = £297.89/month or £3,574.68 annually
Total Employer Cost: £35,000 + £3,574.68 = £38,574.68
New NIC Calculation (from April 2025):
Monthly NIC-able Pay = £2,500.01
NIC @ 15% = £375/month or £4,500 annually
Total Employer Cost: £35,000 + £4,500 = £39,500
This results in an additional £925.32 per employee per year for employees on a £35,000 salary. For larger workforces, this increase will significantly impact annual payroll budgets, requiring businesses to reassess operating costs.
BROADER ELIGIBILITY FOR EMPLOYMENT ALLOWANCE
The significant rise in Employment Allowance to £10,500, alongside the removal of the £100,000 cap, will be a substantial benefit for small and medium-sized businesses. For smaller companies, the allowance increase can cover a significant portion of NIC costs, softening the financial impact of the rate hike. However, larger businesses that previously couldn’t claim EA will now find this change particularly valuable.
WAGE INCREASES AND IMPACTS ON PAYROLL BUDGETS
The uplift in NLW and minimum wages also means that businesses will face higher payroll expenses. Industries with high numbers of low-wage or part-time employees, such as retail and hospitality, will be most affected by these changes. Budget forecasting and cost management will become essential as businesses adapt to paying a higher wage to meet regulatory requirements.
PRACTICAL STEPS FOR EMPLOYERS
As these payroll tax changes will impact bottom lines, it’s crucial to conduct an in-depth payroll forecast to understand how each change affects total payroll costs. If this is something you require expert assistance or advice on, please get in touch.
The enhanced Employment Allowance provides substantial relief, but to maximise its benefits, employers need to ensure full compliance. By signing a declaration form, businesses can secure EA whilst avoiding compliance risks. We are able conduct an internal review for all EA claims, safeguarding clients from potential future adjustments by HMRC.
Businesses with employees in minimum wage roles should evaluate how best to integrate these wage increases. Options include redistributing budgets, adjusting operational models, or assessing where automation or efficiency gains could offset increased labour costs. This is especially critical for small businesses that will face new budgetary pressures with higher wage rates and NIC costs, even with the EA offset.
Finally, it may also be worth investigating any salary sacrifice options available as this can reduce your NIC costs whilst also offering employees valuable support with benefits such as cars, cycles and pensions.
SUMMARY
The payroll tax changes introduced in the Autumn Budget mark a shift toward higher employer contributions and wage standards. While increased Employment Allowance offers some relief, the rise in NIC rates and NLW will challenge businesses to manage costs effectively. Employers should prioritise budget forecasting, leveraging the EA increase, and developing sustainable workforce strategies to navigate these changes.
With new regulatory compliance measures and cost structures, businesses have both a challenge and an opportunity: adapt to rising costs while ensuring fair pay and support for their employees. As we move into this new tax landscape, effective planning and strategy will be key to turning these changes into a foundation for sustainable growth.
GET IN TOUCH
If you wish to discuss any of the above matters in further detail or chat through your personal circumstances, please get in touch with Julie Mason, director of payroll at PM+M using the button below.
