The recent UK Autumn Budget has introduced several changes to Employers’ National Insurance that will impact most businesses.
What are the key changes?
1. Increase in Employment Allowance
The Employment Allowance, which is a government initiative that allows businesses to reduce their employer’s National Insurance contribution, has been raised from £5,000 to £10,500. This is a welcome change for the many businesses who qualify for this allowance.
It should be noted that the Employment Allowance can only be utilised up to the value of Employers’ NIC you are due to pay. For example, a qualifying business with Employers’ National Insurance of £1,000 will only be subject to an allowance of £1,000.
2. Reduction in Secondary Threshold
The secondary threshold for Employers’ National Insurance contributions has been reduced from £9,100 to £5,000. This means employers will now start paying National Insurance at a lower salary threshold.
3. Increase in Employers’ NIC Rate
The Employers’ National Insurance rate has increased from 13.8% to 15%. This increase will directly impact the amount of National Insurance employers are required to pay.
What Does This Mean for Director Salaries?
Many Directors currently set their salaries based on what is most tax-efficient for both themselves and their business, typically around the secondary threshold (£9,100) or the personal allowance (£12,570). With these recent changes, it’s essential to revisit these salary levels.
Is It Still Tax-Efficient to Keep Directors Salaries at the Same Level?
We’ve carried out detailed calculations for our clients, and in most cases, it doesn’t make sense to alter salary levels. Common salary levels of £9,100 or £12,570 generally remain the most tax efficient. Here’s why: –
- Reducing Salary to £5,000:
While you might consider reducing your salary to £5,000 to avoid paying Employers’ National Insurance, this strategy has drawbacks:- Lower Earnings Limit: A salary of £5,000 falls below the Lower Earnings Limit of £6,500. As a result, your National Insurance contributions would not qualify for state pension purposes, potentially impacting your future pension entitlement.
- Corporation Tax Relief: Lowering your salary would reduce the corporation tax relief available on your salary payments, offsetting any potential savings from avoiding Employers’ National Insurance.
- National Insurance Costs on Common Salary Levels:
With the new rules in place, here’s how Employers’ National Insurance breaks down for common Director salary levels: –
- Salary £9,100: NI due £615
- Salary £12,570: NI due £1,136
If we process your payroll, we will provide these calculations throughout the year to ensure you’re aware of your liabilities and how to pay them.
Are you Eligible to Receive the Employment Allowance (EA)?
- Single Director Companies: If your company has only one Director and no other employees earning above the secondary threshold (£5,000), you will not qualify for the Employment Allowance.
- Other Companies: Only one Employment Allowance can be claimed by any group of companies or any connected companies.
As noted above, single-Director companies will not qualify for the allowance and will therefore see an increase in Employers’ National Insurance exceeding £600 per annum.
The requirement to have an additional employee who is paid above the secondary threshold of £5,000 (£417 per month) does not have to apply for the entire year. HMRC will likely scrutinise claims for the EA closely, as many businesses may employ additional staff temporarily to benefit from the allowance. It’s crucial to ensure that wage payments are managed correctly.
What will be the Increase in Employers’ NIC for Businesses with Employees?
In most cases, businesses will see an increase in Employers’ National Insurance. However, some businesses employing a small number of employees may see a reduction. Below are examples of how these changes could affect different businesses:
Company 1:
1 Director paid a salary of £12,570
4 Employees paid £30,000 each
- 2024/2025 Employers’ NIC Liability: £7,016
- 2025/2026 Employers’ NIC Liability: £5,636
- Saving: £1,380
Company 2:
1 Director paid a salary of £12,570
15 Employees paid £30,000 each
- 2024/2025 Employers’ NIC Liability: £38,742
- 2025/2026 Employers’ NIC Liability: £46,886
- Additional Cost: £8,144
Company 3:
1 Director paid a salary of £12,570
25 Employees paid £35,000 each
- 2024/2025 Employers’ NIC Liability: £84,834
- 2025/2026 Employers’ NIC Liability: £103,136
- Additional Cost: £18,302
Given the expected increase in NIC, regular budgeting, forecasting, and management accounts will be vital to navigate these cost increases effectively.
Helping you prepare for Employers’ National Insurance increases
Unsure about the National insurance Contribution increase and how this may affect you? If you require assistance regarding any of the above changes or related matters, contact JWR Accountants chartered accountants and tax advisors in Waterlooville 02392 269977 or email enquiries@jwraccountants.co.uk