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Employers were hit with a 1.2% increase in Class 1 national insurance contributions (NICs) on 6 April, raising cost of hiring a single employee by up to £900 a year
The tax hike saw the Class 1 National Insurance contributions (NIC) rate rise to 15% a year from the current 13.8%, and the halving of the starting rate for paying employer national insurance (NI) from a £9,100 secondary threshold to only £5,000 per year.
The cut in the threshold saw hundreds of thousands of part-time workers dragged into employers’ NI for the first time. This will hit retail and hospitality sectors hard, with major supermarkets, for example, projecting multimillion pound hikes in employment costs.
To support small businesses, the government has increased the employment allowance from £5,000 to £10,500 from 6 April, and removed the £100,000 threshold, expanding this to all eligible employers.
The retail sector alone supports 2.8m jobs, many part-time, with the British Retail Consortium predicting up to 160,000 part-time roles are at risk over the next three years.
Helen Dickinson, chief executive at the British Retail Consortium, said: ‘Last October’s Budget forced retailer wage bills up by over £5bn, and both the rise in employer NICs and increased national living wage have made hiring significantly more costly.
‘A recent survey of retail finance directors showed that half were planning hiring freezes or cutting jobs, both in head offices and stores across the UK.’
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The NI increase was announced in the Budget last October, with chancellor Rachel Reeves saying it was necessary to fund NHS backlog and get public services back on their feet.
The hike is expected to raise £23.7bn a year for the duration of this parliament, which can run until July 2029 under the fixed term rules. It will affect 1.2m businesses, including care homes and hospices, as well as the charity sector.
It is also seen as a reliable tax as it is hard to evade, which adds to the chancellor’s argument for hitting businesses with a very focused employment tax, rather than changing already high corporation tax rates.
The only option to reduce NICs’ liability is to cut jobs, reduce hours or use salary sacrifice schemes to offset some tax bills.
For every £100,000 of salary employees sacrifice into their pension, the saving in employer NICs will be £15,000 from 6 April, said Hymans Robertson.
Hannah English, head of DC corporate consulting, Hymans Robertson, said: ‘The savings employers could benefit from should not be understated. For every £100,000 of salary sacrificed, a £15,000 saving unlocks doors for businesses at a time where costs are being squeezed.
‘Employers who already have a salary sacrifice system in place should maximise employee pension contributions in this way. They could also encourage further savings into a pension through other means – for example, through bonus sacrifice.’
The government predicts 940,000 employers will have to pay more national insurance, and only 250,000 small businesses will see a drop in costs.
UK Hospitality represents hospitality businesses, which are bracing themselves for the rises, expected to cost the sector £1bn a year.
Kate Nicholls, chief executive of UKHospitality, said: ‘The costs hitting hospitality this month are eye-watering, and the impacts it will have on businesses, teams and communities are stark.
‘We’ve already seen a chilling effect on investment plans and job creation – all of which have been put on hold or shelved.
‘As costs begin to bite, we’ll see venues having to tighten their belt even further through restricting trading hours or, in a worst-case scenario, cutting jobs.’
More red tape for small business
It is important to note that there will be additional admin for some small businesses which currently hire employees earn below the lower earnings limit (LEL).
Previously, they would not have had to send a real time information (RTI) return to HMRC. From 6 April 2025, these employers will have to submit RTI returns if any of their employees earn above the secondary threshold.
The secondary threshold of £5,000 a year will be in effect until 5 April 2028, then it will increase in line with CPI inflation.
HMRC has made IT changes to support implementation of this tax change, estimated to cost in the region of £900,000.
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