Will Budget’s national insurance increase affect your wages? We explain what it means

The Chancellor provided her largest tax increase in the budget in the form of an increase in employer contributions to national insurance.

The widely expected increase in the autumn budget will see companies pay more for their employees’ pensions, from 13.8 per cent to 15 per cent, raising £25 billion a year.

The threshold at which employers charge national insurance has also been reduced from £9,100 to £5,000 per year. The changes will come into effect in April 2025.

Labor has repeatedly said it will not increase taxes on working people, but businesses have warned the move could have damaging effects on jobs and wages. The Office of Budget Responsibility expects that 76 percent of the increase will be passed on in lower wage increases.

Why is the Chancellor increasing employer NICs?

Rachel Reeves’ first budget heavily blamed the previous Tory government for leaving the public finances in a poor state.

She previously said she would have to raise taxes to plug a ‘£22 billion black hole’ in the public finances.

However, Labour’s manifesto ruled out increases in income tax, national insurance and VAT, leaving it with little to do.

It means Reeves had to find tax increases elsewhere. Theoretically, increasing employer NICs has no direct impact on employees as their take-home pay remains the same. Instead, it’s employers who have to take the hit.

However, an increase in income for employers has been called a “tax on jobs” and could continue to erode already declining confidence in government.

Some companies have already warned that they will have to halt hiring, pay increases and pension contributions.

Will the increase in the employer’s pension affect the net salary?

Increasing employer national insurance contributions will not have a direct impact on pay packages, but will put potential pressure on revenues.

Currently employers pay NI at 13.8 per cent on an employee’s earnings above £9,100 per year, but in April 2025 this will change to 15 per cent on earnings above £5,000.

The increase, coupled with a reduction in the secondary threshold – the point at which NICs are paid – means employer taxes will rise by a quarter for an employee earning £36,000, according to tax firm Blick Rothenberg.

The burden is on the business community, as Reeves reaffirmed her pledge not to take money out of the pockets of working people.

Employees’ NICs will remain at the same level of 8 per cent, compared to 12 per cent last year, after former Chancellor Jeremy Hunt cut them by 2p in his March budget, following a 2pm cut at the start of the year.

Although take-home pay remains unaffected, changes to employer NICs will almost certainly trickle down to employees.

The changes to NICs coincide with the announcement that the minimum wage will rise to £12.21 for over-21s, and £10 for those aged 18 to 20.

Additional costs are a brake on future wage increases and bonuses for employees, as companies struggle with additional costs.

Fiona Fernie, partner at Blick Rothenberg, said: ‘Rachel Reeves’ increase in employers’ NIC cannot (technically) breach the government’s manifesto commitments.

“However, this is unlikely to stimulate business growth.

‘The higher cost of employing staff is likely to have a negative rather than a positive impact, either in terms of reduced hiring or lower wages – assuming employers follow the rules closely.’

The changes could also impact pension contributions and other benefits, such as health care, as companies offset the higher costs. The government stopped adding employer NI to pensions, an idea rejected by experts.

Helen Morrissey, head of pensions analysis at Hargreaves Lansdown, added: ‘The piling on of additional costs for employers, alongside a planned increase in the minimum wage, is likely to result in lower wage growth in the longer term.’

Morrissey said: ‘In the longer term, we need employers to increase their pension contributions above the minimum requirements for auto-enrolment, as the government looks to boost auto-enrolment.

‘However, given the additional demands placed on employers by the increased NICs.’

What about smaller companies?

Rachel Reeves tried to soften the blow for smaller businesses by increasing the employment allowance from £5,000 to £10,500. This allows smaller businesses with fewer employees to reduce their NI liability.

She said this means 865,000 small employers will not have to pay NI charges next year, explaining that this was the equivalent of four full-time workers on the new national living wage.

How will walking employer NICs affect the economy?

Reeves said she was proposing a growth budget, but there is a risk that raising taxes on businesses could backfire and stifle economic activity and deter international companies from investing in Britain.

It could also discourage employers from recruiting new workers, especially young workers, which could hit UK productivity.

Robert Salter, partner at Blick Rothenberg said: ‘The increase in the national minimum wage for young adults – which will rise by 16.3 per cent from April 2025 – will simply make it increasingly unlikely that small businesses will invest in recruiting younger, less experienced staff. .

‘This will realistically result in an increasing number of NEETs – that is, those who are not in work or training.’