The biggest tax collection announcement in the Budget was the increase in Employers NIC, which applies to all business/organisations that have employees.
The increase takes place in two ways:
- Firstly, by increasing the rate by 1.2% to 15%;
- Secondly, per-employee threshold, the point at which employers become liable to pay National Insurance (the Secondary Threshold) will be reduced from £9,100 to £5,000 from 6 April 2025.
The Employment Allowance will increase from £5,000 to £10,500, which help a small business/organisation, with few employees and low salary costs, but in the main the majority will feel the impact.
For someone earning £20,000 in 2025-26 their employer will pay. £2,250 in secondary Class 1 NICs. That is an increase of £746 (or nearly 50%). For an employee earning £40,000 in 2025-26 the employer will pay £5,250. This is an increase of £986 (or about 23%). For an employee earning £60,000 in 2025-26 the employer will pay £8,250. This is an increase of £1,226 (or about 17.5%).
Tesco is reported to be facing an extra £1bn in cost with the increases in minimum wage, and employers NIC over the next four years. Most employers have already indicated that this cost will be passed on to customers, and/or minimising pay rises.
There is a way to minimise the increase in Employers NIC, which will also help workers, this is via Salary Sacrifice Schemes.
Salary Sacrifice allows the business to make pension contributions or pay for other benefits such as company cars, bicycles or medical insurance from the employees’ gross salary before income tax is taken. This “sacrifice” results in the employee’s salary being lower and so that the employee pays less tax and employee’s NICs, and the employer less employer NIC.
If the benefit provide is a taxable benefit, for example medical insurance, Employers pay class 1A NIC, however the value of the benefit provided tends to be cheaper than paying the equivalent in salary.
It should also be noted the Budget confirmed that from April 2026, mandatory reporting of Income Tax and Class 1A NIC for most Benefits In Kind in real-time through payroll software. Currently only employment-related loans and accommodation benefits are exempt.
The Chancellor did not announce any changes to Salary Sacrifice arrangements, and therefore employers could consider altering their workplace pension scheme to try to reduce the impact of the national insurance increases.
One of the most common reasons for using the scheme is to reduce the Tax and National Insurance the employee pays and boost your pension contributions. You must formally sacrifice an employee’s salary, which must be correctly documented by way of a Salary Sacrifice Agreement.
In addition to benefits, an employee may be motivated to agree to a Salary Sacrifice Arrangement to help reduce their income to keep more child benefit.
It also works for those parents teetering on the £100,000 salary cliff edge. Once your income rises above £100,000 you start to lose the personal allowance, and access to some Government support for childcare, You lose one percentage point of the £12,570 personal allowance for every £2 earned above £100,000. This means that by the time you reach an income of £125,140 you lose all your personal allowance.
You also lose tax-free childcare, which is worth up to £2,000 a year per child, once you hit the £100,000 salary point and the 15 free hours a week of childcare for children from nine months. The free hours for children aged three to four is slashed from 30 to 15 weeks.
Therefore, employees may have many reasons to agree to a Salary Sacrifice Arrangement.
Potential pitfalls
Lowering, salary can affect how much money an employee could borrow for a mortgage, although some lenders may take sacrificed salary into account. It could also impact the ability to take out a loan or credit card.
Also, if you are providing employees with Life Cover this is usually worked out as a multiple of salary. If the employee agrees to exchange part of their salary, then this could mean lower life cover.
A lower income may also mean that employee may have lower Statutory Maternity or Paternity Pay.
Employing Ex Service People
It may also be worth reviewing your workforce to see if you employ an ex-service people, or look at recruitment policy. The Budget confirmed that the NIC relief for employers who hire veterans will be extended for one year, which allow employers to pay no employer NICs in the first year of employing a qualifying veteran.
The relief is available to any business employing a veteran who:
- has served at least one day in the regular armed forces (or completed at least one day of basic training); and
- is making their first move into civilian employment.
It doesn’t matter when the veteran left the armed services. However, the relief only applies for 12 months from the date the veteran first moves into a civilian role. If during this 12-month period the veteran changes job, their new employer can continue to claim relief, but only up to the end of the original 12-month period.
