10 ways to offset Employer’s National Insurance Contributions rise

Posted 19 November 2024 | 0 Comments

On 30^th October 2024, the Chancellor of the Exchequer announced an increased to Employer's National Insurance Contributions (NICs) of 1.2% to 15.0% from April 2025. With the lowering of the secondary threshold, employers will pay this on earnings above £5,000 rather than above £9,100. The smallest businesses benefit from an increase in the employment allowance from £5,000 to £10,500 if Class 1 NI liabilities are under £100k in the previous tax year. All told, the extra money to the Exchequer is estimated to bring in £25bn, increasing the burden on businesses. Some have already leapt on the news of the small increase in unemployment (4.0% to 4.3%) as of last quarter to suggest an impact. So, what to do about it? Today we discuss 10 ways to offset Employer's National Insurance Contributions rise.

Employer's National Insurance Contributions

Employer's NICs are a tax on the payroll of organisations and are separate to what an employee pays out of their earnings. This tax revenue is supposed to pay for healthcare, social welfare benefits and pensions. At present that rate is at 13.8% of employee earnings above £9,100. For an employee earning £25,000, the employer pays £2,194.20. From April 2025, that rate increases to 15.0% of employee earnings above £5,000. For the same employee earning £25,000, the employer pays £3,000.00 - an increase of £805.80.

If we move the picture on to a senior manager earning £80,000 per annum, the additional Employer's NICs totals £1,465.80 or £122.15 per month. On a payroll of £1m, the total bill could surpass £131,000 based on an average salary of £40,000 per person. The result is some potentially hard decisions for employers. Now, let us look at 10 ways to offset the Employer's National Insurance Contribution increases.

10 ways to offset Employer's National Insurance Contributions rise

There are a number of options following the Chancellor's tax raid on business. Despite rhetoric claiming that such a move will not impact 'working people', it took less than 24 hours for an admission that it would. So, let's look at the ways you could offset the increase:

1. Hiring freeze

If it sounds obvious, it is. Not hiring for vacant roles or freezing backfill hires is one of the quickest things you can do. Less people equals less tax to pay. In the example above, the additional Employer's NICs on a payroll of £1m is around £25,000. At the new minimum wage of £12.21 from April 2025, this could equate to 1 FTE at £22,282 (35 hours) to £23,874 (37.5 hours) per annum.

2. Pay freeze

On the above payroll of £1m, a 3% pay increase to keep ahead of inflation (estimated to be 2.5%-2.75% in 2025), costs £30k. The additional Employer's NICs represents a simple 15% on the increase or £4,500 rather than £4,140 previously. This could represent a supervisor or manager salary. Given the softening in tone on interest rate cuts from the current 4.75%, wage pressure may persist above this level. Therefore, the case for pay freezes looks more attractive as the increases compound - often with no corresponding increase in productivity.

3. Pay band freeze

One step is to freeze pay rises, which directly hits people in the pocket and erodes their living standards. Another option is to maintain salary bands (if you have them). This takes longer to benefit the organisation and is similar to the 'fiscal drag' effect of freezing income tax bands. If an employee earns £34,000 as a grade C but grade C tops out at £35,000, a pay rise of just under 3.0% brings them to the top of the band. The year after, assuming the bands stay the same, there is no pay increase unless they are promoted or their role changes.

4. Pay lower salaries

Arguably, this is what has happened to many jobs over the last two decades. As wage arbitrage, competition, technology and automation eroded earning power, employers have paid less for more. Aside from customer-facing roles, it isn't uncommon in back-office roles to see 'Frankenstein jobs' that look stitched together from dozens before you. More simply, you could choose to hire at the start of a pay band of £28,000-£35,000 for grade C as per the example above. If your previous approach was to publish the range or offer in the middle, you could now simply offer the starting £28k.

5. Pay more pension

At the moment, employers do not pay Employer's National Insurance on payments made into employee pension pots. Therefore, it could be that pay increases and changes to pay bands give way to more generous pension provision. This is especially enticing if you currently pay the minimum 3% workplace pension contribution. Employees may initially resent the lack of salary increase but at least they receive more remuneration another way.

6. Increase productivity

Although easier said than done, an unproductive workforce or one with high absence rates needs attention. Many employers resent pay increases and more tax for the same or less output per hour. As quiet quitting, resentment and absence undermine productivity, the problem comes into sharper focus as it costs you more. However you achieve it, even accounting for Trade Unions, it may give you headroom to increase salaries on a smaller workforce. The reality will not be lost on reps to protect as many jobs as possible.

7. Increase prices

Even the Bank of England is sitting on the fence about how companies will offset Employer's National Insurance Contribution increases. Independent of political policy decisions, the BoE knows that some businesses may choose to raise prices, increasing inflation. If your workforce is large, labour-intensive and/or face-to-face, price rises are more attractive. Fewer staff may worsen service, endanger colleagues, reduce quality or increase theft. Furthermore, if the majority of your employees earn the Employer's Minimum Wage, customers are more likely to understand the rationale.

8. Create a cycle-to-work scheme

Apart from doing your bit for the environment, a cycle-to-work scheme is tax efficient. A salary sacrifice scheme is deducted at source from employee gross earnings. As a result, employees pay less income tax and NICs. Similarly, employers save on Employer's NICs and the Apprenticeship Levy (where applicable and until a new scheme is announced). Further benefits might include improved wellbeing or reduced public transport or car parking costs.

9. Hot desking, hybrid or remote working

Hot desking requires fewer desks with people working in locations at specific times. This makes more efficient use of the available desks. Additionally, if combined with hybrid working, employees may attend a physical location only once or twice per week, further reducing the need for desks. The radical measure taken by many businesses, especially in technology, is full remote working, thereby removing the need for commercial office space. The cost savings may more than make up for increased National Insurance Contributions.

10. Expansion of offshoring overseas

Despite HM Government's tax grab, not all companies are willing to pay more. Options might include moving roles to other jurisdictions with lower payroll taxes. Similarly, expansion plans may motivate owners and investors to situate workers outside of the UK or acquire non-UK businesses with cheaper workers. As we see high-net worth individuals flee these isles, we may also see their future workforces located outside of the UK. Ireland, for example, has a Pay Related Social Insurance (PRSI) of 8.9% above €38p/w and 11.15% above €496p/w. For an employee earning £25k (c€30,000) per annum, this equates to a Employer's NICs saving of over £840 per annum come April 2025.

Conclusion on Employer's National Insurance Contributions rise

We are a management consultancy that supports leaders to find growth opportunities and accelerate performance. Though the above is not exhaustive, we have many transformation options available to boost performance and profitability. Some are simple and some are more complex. With a relatively tight labour market, there remains scope to make changes that preserve profitability. Many firms have already taken steps and some already planned for various eventualities with professional advisors. In summary, we can support strategic choices, organisational change and transformation initiatives to keep you on track.

If you would like to find out more, simply e-mail our advisors direct or request an initial introduction online.

Alternatively, why not check out our related summary of budget tax and spend changes.

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