The biggest tax raising measure announced by the chancellor in her budget last week were changes to employer national insurance, taking effect in April 2025.
Implications
The implications of the changes are that self-employment will become more attractive compared to doing business through a company.
For owner-managers, dividends will become relatively attractive form of drawing remuneration compared to salary. I would still recommend some salary be drawn by most owner managers to ensure a qualifying year for the purposes of entitlement to the state pension.
Although I would not recommend engaging in any artifice here, the increased value of the employer's allowance will draw some into trying to create duplicate companies with sufficiently different controlling ownership structures to try to claim this allowance twice over (each controlling owner gets one employer's allowance to be used on all their companies).
Decrease in threshold
The threshold at which national insurance is payable by employers ("secondary threshold") is decreased from £9,100 annually to £5,000. This increases the amount of pay subject to national insurance by up to £4,100.
Increase in tax rate
The rate of employer's national insurance increases to 15% from 13.8%
Employment allowance
The amount of employer's allowance, which can be offset against employer's national insurance, is being increased from £5,000 to £10,500. This means that the first £70,000 (£10,500 / 15%) of pay subject to NICs will not be subject to employer's national insurance, a significant increase from the current threshold of £36,231 of pay (£5,000 / 13.8%).
Employment allowance for owner managed businesses
Companies whose only employer's national insurance liabilities arise in respect of salary paid to a single director cannot claim the employer allowance. This restriction to owner managed businesses has been in place since 2020, but the increase in the employer's national insurance rate, the decrease in the secondary threshold, and the increase in employer's allowance will combine to increase the financial significance of this restriction.
Winners
Many employers will be worst off from the changes, but the increase in employer's allowance has created some winners from the changes who end up paying less tax. Winners will have less employees on lower average wages. The table below shows the threshold beyond which employers pay more in 24/25 compared to 23/24 assuming each employee is paid the same and the employer is entitled to the employer's allowance.
Number of employees | Salary per employee beyond which 24/25 employer's national insurance is higher than in 23/24 and vice versa |
1 | £416,183 |
2 | £187,017 |
3 | £110,628 |
4 | £72,433 |
5 | £49,517 |
6 | £34,239 |
Employers of 9 or more equally paid workers will universally be worse off in 24/25.
Worked examples: winner
For a cafe paying 4 employees £25,000 each per year, the employer's national insurance liability from 6 April 2025 will be 4 employees x (£25,000-£,5,000 secondary threshold) x 15% - £10,500 employment allowance, or £1,500. For the prior tax year the employer's national insurance will be 13.8% x 4 x (£25,000 - £9,100) - £5,000, or £3,776.80 - a saving of £2,276.80.
A small firm paying 3 staff £75,000 annually will see its national insurance from 6 April 2025 increase to x staff x (£75,000 - £5,000) x 15% - £10,500= £21,000. In the prior year, the national insurance bill would be 3 x (£75,000 - £9,100) x 13.8% - £5,000 = £22,282.60 - a saving of £1,282.60
Worked example: owner managed business
An owner-manager who pays himself or herself £50,000 per year and has no other employees will pay (£50,000-£5,000) x 15% = £6,750 in employer's NI from 6 April 2025, compared to (£50,000 - £9,100) x 13.8% = £5,644.20 in the prior year - an increase of £1,105.80.
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