What It Means for Your Business
The Chancellor’s autumn budget announcement on 30th October 2024 has left small business owners uncertain about how the array of tax changes will impact them. While Rachel Reeves pledged not to affect the payslips of working individuals, this ultimately shifted the focus onto nearly 5.5 million businesses, now facing the brunt of her headline tax hike: a rise in Employer’s National Insurance (NI). Among these businesses, 1.4 million employ staff, the majority of which are small businesses with no more than 49 employees. These smaller employers face the most uncertainty about what this change means for them.
What Has Changed with Employer’s NI?
Starting in April 2025, Employer’s NI will increase by 1.2%, taking the rate up to 15%. Additionally, the Secondary Threshold, which is the minimum salary amount before Employer’s NI is triggered, will decrease from £9,100 to £5,000. To offset this impact for smaller employers, Reeves has announced a more than doubling of the Employment Allowance (EA) from £5,000 to £10,500, while also removing the eligibility threshold currently capped at £100,000 in Employer’s NI liability. This means that employers of all sizes can now benefit from the EA.
Will Your Business Be Better or Worse Off?
In her address, Reeves claimed that by next year, 865,000 employers would not pay any Employer’s NI, while over 1 million would pay the same or less than they currently do. But what about everyone else?
The accountants at Ridgefield Consulting have run some numbers to give a clearer picture of how these changes could impact various business scenarios:
1. You’re the Sole Director of Your Limited Company with No Employees
If you currently pay yourself a director’s salary of £12,570, you’re exempt from employee NI but are liable for £478.86 in Employer’s NI annually. From April 2025, if your salary remains £12,570, you’ll continue to pay no employee NI, but your Employer’s NI will rise to £1,135.50 annually, an increase of £656.64, meaning you’ll be worse off.
2. You Own a Limited Company with One Other Director
For companies with two directors earning above the Primary Threshold, EA is available. For example, with both directors taking a salary of £27,000, each would pay £1,154.40 in employee NI per year. The company’s total Employer’s NI liability of £4,940.40 would be fully covered by EA, leaving no Employer’s NI to pay.
Post-April 2025, increasing both salaries to £39,000 would result in £2,114.40 each in employee NI. The Employer’s NI liability would rise to £10,200, which would still be entirely covered by the EA. However, whether you’d be better off depends on personal factors like income tax rates and company profits. This setup may benefit those who can’t rely on large dividend payouts.
3. You Have Five Employees on Your Payroll
In a case where there are two part-time employees each earning £21,000, two full-time employees earning £35,000 each, and a director’s salary of £12,570, the current total Employer’s NI liability would be £5,911.66 after EA.
If salaries remain the same, the Employer’s NI liability would decrease to £4,435.50 after EA in 2025, resulting in a £1,476.16 saving, making it beneficial in this scenario.
Conclusion: Mixed Outcomes for Small Business
While these scenarios offer a range of outcomes, it’s important to note that 76% of UK limited companies are sole-director entities with no employees, making them easy targets for the tax increase. Small business employers may see some benefit, but larger employers could quickly exhaust the EA, potentially affecting employee wage growth.
Are There Hidden Opportunities?
Though these tax increases are intended to restore NHS funding, concerns are mounting among healthcare providers, particularly GP surgeries, which aren’t exempt from the Employer’s NI increase and are expected to feel the strain. It’s projected that over 2 million GP appointments could be affected by this tax hike. This may lead to more patients seeking private healthcare or turning to complementary and alternative medicines (CAM) instead.
Payroll expert Bikram Giri from Ridgefield Consulting suggests that business owners concerned about reduced take-home earnings due to the increase in Employer’s NI might consider salary sacrifice schemes as a way to reduce tax liability while retaining certain benefits.
These changes in Employer’s NI bring both challenges and potential strategies for adaptation.
Business owners should review their payroll & consult with professionals to understand their best course of action in the year ahead.
Main – Photo by Mikhail Nilov
