Employers' national insurance: will it go up and when?

With the Treasury reportedly considering an increase in national insurance contributions for employers in the upcoming Budget, what does this mean for HR and payroll teams?

What could happen to employers' national insurance?

The new Labour government has famously said it needs to plug a £22 billion black hole in the nation's finances.

According to reports this week, chancellor Rachel Reeves is looking to make tax rises and spending cuts to the value of £40 billion in the Autumn budget, which takes place on 30 October.

The Labour party has vowed not to raise income tax or NI for employees, stating in its manifesto that "Labour will not increase taxes on working people, which is why we will not increase national insurance, the basic, higher, or additional rates of Income Tax, or VAT."

However, Reeves could increase the rate of NI paid by employers, and speculation is growing that this will be the case in two weeks' time.

How much do employers pay in national insurance?

Employers pay a rate of 13.8% on employees' earnings above a threshold of £9,100 a year. They also pay Class 1A and 1B NI contributions on expenses and benefits they give to their employees, at a rate of 13.8%.

An employment allowance is currently available to small employers to reduce their NI bill. This will allow some employers to reduce their NI liability by up to £5,000 for the tax year 2024/25.

For employees, the starting rate of NI has been reduced twice in 2024, from 12% to 10% in January, and then from 10% to 8% after the Spring budget.

In 2023-24, employer NI contributions raised £109 billion, according to the Institute for Fiscal Studies. Employee contributions raised £60 billion.

How much would employers' national insurance increase?

This is so far unclear. However, an increase of 1 percentage point to 14.8% of earnings would bring in £8.5bn in 2025/26 and more in the following years, according to a government analysis of hypothetical tax changes.

Some economists argue that increasing employer NI contributions would still have an indirect impact on workers because companies might lower wage rates, reduce hiring because of the associated costs, or offer employees fewer hours of work.

Paul Johnson, director of the Institute of Fiscal Studies, said an increase to employer NI contributions would be a "straightforward breach" of Labour's manifesto commitment because the pledge did not distinguish between employer and employee contributions.

What do businesses think?

Labour-intensive businesses are more likely to feel this squeeze than others. UKHospitality chief executive Kate Nicholls described the move, if it goes ahead, as a "tax on jobs" because it would raise the cost of employment in a people-reliant sector.

The Federation for Small Businesses said the increase would be "anti-growth" and would hamper job creation among smaller employers.

Will employers have to pay National Insurance on pension contributions?

Earlier this month, former pensions minister Sir Steve Webb said that placing a NI charge on employers' pension contributions - they are currently exempt from tax - could net around £16 billion in revenue.

There has been widespread speculation that the Budget could set out plans for employers to begin paying NI on their pension contributions.

The Association of British Insurers claimed that millions of employees would face a poorer retirement if this goes ahead.

"We want to see money flowing into pensions to drive growth, and we also want employers to be incentivised to provide good pensions for their workers," said Yvonne Braun, director of policy, long-term savings and health and protection at the ABI.

"These changes would have a negative impact on both. They would also mean lower retirement standards in the future at a time when we're already not saving enough for the long term."

Other options to raise revenue, explored by pensions expert Steve Herbert, might include removing the tax-free cash sum at retirement or levelling tax relief of employee pension contributions to a basic rate.

How will changes to National Insurance impact contractors?

In 2021, IR35 or off-payroll rules came into force whereby if a business is seen to be the "deemed employer" of a contractor, it must pay the appropriate tax and national insurance for that person.

In response to this legislation, many businesses took the decision to move contractors on payroll to avoid the risk of fines for underpayment of tax and NI.

Seb Maley, CEO of contractor insurance provider Qdos, said any hike in employers' NI contributions would mean not just the direct cost increase on those staff on payroll, but potentially an indirect hit because non-compliance with IR35 rules would attract a much higher cost.

He said: "In other words, firms found to have mismanaged these controversial rules would be hit with bigger tax bills from HMRC. Above all else, this highlights the importance of businesses meeting their obligations from a compliance perspective.

"Added to this, should the cost of employing staff rise, businesses that have needlessly insisted that all contractors operate on the payroll regardless of their IR35 status desperately need to rethink their stance."

Shifting these contractors onto payroll and new employment contracts to reduce risk would also cost more as a result, he pointed out.

When would the changes to National Insurance take effect?

Typically, changes to income tax announced in an Autumn budget would take effect at the start of the next tax year, which is 6 April 2025.

However, there is precedent for these changes taking effect earlier, as was the case this year when National Insurance for employees fell from 12% to 10%.