National Insurance Changes: What Employers Need to Know
As of 6th April, businesses across the UK have faced two significant changes to National Insurance contributions (NICs), impacting their payroll costs. The rate of secondary Class 1 NICs has risen from 13.8% to 15%, and the threshold at which employers must start paying NICs on employees’ earnings have dropped from £9,100 to £5,000.
These changes mean businesses will be paying more in employer NICs and on a larger portion of employees’ salaries. For small and medium-sized businesses, these additional costs can add up quickly, affecting cash flow and profitability. However, there are ways to manage the impact and even reduce your National Insurance bill.
What Do These Changes Mean for Employers?
- Higher NIC Costs: A 1.2% rise may not seem significant, but across a workforce, it can lead to a substantial increase in payroll costs.
- Lower Employer NIC Threshold: Previously, businesses only had to pay employer NICs on salaries above £9,100, but as of 6th April, this has lowered to £5,000, meaning more earnings will now be subject to NICs.
- Increased Payroll Expenses: These changes will be felt most by businesses with larger workforces, as the additional employer NICs must be factored into wage bills.
How Can Businesses Reduce National Insurance Costs?
While these changes mean higher employer contributions, there are some practical steps businesses can take to ease the financial burden.
1. Use Salary Sacrifice for Pension Contributions
One of the most effective ways to reduce employer NICs is through a salary sacrifice scheme (also known as salary exchange). Under this arrangement:
- Employees agree to exchange part of their salary for non-cash benefits, such as pension contributions.
- Because their taxable salary is reduced, both the employer and employee pay lower NICs.
- Employers can reinvest the savings back into the business or even pass some benefits onto employees, boosting retention and morale.
For example, if an employee contributes £3,000 annually to their pension, moving this to a salary sacrifice arrangement could save an employer 15% of that amount (£450).
2. Consider Flexible Working and Part-Time Roles
Reassessing staff work patterns can also help businesses reduce NIC costs. Introducing flexible hours, job-sharing, or outsourcing some roles could lower payroll expenses while maintaining productivity.
3. Optimise Bonus and Dividend Payments
For directors and owner-managed businesses, reviewing the mix of salary, dividends, and bonuses can help optimise tax efficiency and reduce NIC costs. Consulting with an accountant is essential to ensure compliance while maximising savings.
4. Invest in Other Employee Benefits That Aren't Subject to NICs
Rather than increasing salaries (which will incur higher NIC costs), consider providing alternative benefits such as:
- Private medical insurance
- Additional holiday entitlement
- Company car schemes (electric vehicles offer tax incentives)
By structuring pay and benefits strategically, businesses can maintain employee satisfaction while helping to manage rising costs.
Plan Ahead to Manage the Impact
Now is the time for businesses to review payroll strategies, explore tax-efficient options, and consider salary sacrifice schemes.
At McKenzies Accountants, we can help you navigate such changes and implement strategies to minimise costs while staying compliant. If you need expert advice on salary sacrifice schemes, NIC planning, or payroll efficiency, get in touch with our team today.
Contact our team of accountants at McKenzies to discuss how we can help you reduce your National Insurance bill and optimise your payroll strategy for the year ahead.