Mitigating the forthcoming employer NICs rises

Many businesses across England, Wales and Scotland will be facing an increase in employment costs from April this year as a result of changes to the secondary Class 1 National Insurance Contributions (NICs) regime which are due to take effect from 6 April 2025.

In this article, we explore some of the steps that employers can take to mitigate those costs.

What is changing?

At the Autumn Budget on 30 October 2024, the government announced a number of measures aimed at increasing revenue from employer NICs.

As a result of these measures, from 6 April 2025:

• the NICs Secondary Threshold, being the earnings after which an employer becomes liable to pay secondary Class 1 NICs on an employment, will be reduced from £9,100 a year to £5,000 a year. This change will be in effect until 5 April 2028 after which date the threshold will increase in line with the Consumer Prices Index; and

• the rate at which secondary Class 1 NICs are payable will increase from 13.8% to 15%.

What actions can employers take to minimise their employer NICs liabilities? 

There are a number of steps that businesses can consider taking in order to minimise their employer NICs liabilities. 

Review entitlement to the Employment Allowance

Some beneficial changes to the Employment Allowance, which currently provides relief of up to £5,000 per employer against their secondary Class 1 NICs liabilities, were also announced at the Autumn Budget 2024.

From 6 April 2025, the maximum Employment Allowance will increase to £10,500 which will be particularly beneficial for smaller companies with relatively few employees.

In addition, the restriction which currently applies to the Employment Allowance and means that employers who have incurred a secondary Class 1 NICs liability of more than £100,000 in the tax year immediately prior to the year of claim are unable to claim the allowance will be removed.

Look at alternative reward structures

As a result of the employer NICs increases, businesses unable to fund significant (or in fact, any) salary increases or bonus awards, may be grappling with how to motivate employees.  Moving to a share-based reward structure may offer these businesses a practical alternative.

Share options are an attractive share option structure, offering employees the right to buy shares in their employer company in the future at a price fixed at the date of grant.  The price is often the market value of the shares at the date of grant.  Typically, the employee may exercise the right to buy the shares at set vesting dates, when meeting set performance conditions or when the company is sold, provided they remain in employment. 

Share options can often be structured to deliver tax efficiency for the employee and the employer – tax-advantaged share options can take the form of Enterprise Management Incentive options, Company Share Option Plan options or, if the arrangement is to operate on an all-employee basis, as Save as You Earn options.

Even the grant of unapproved (i.e. non-tax advantaged) options can be beneficial for employers, since no employer NICs liabilities will arise until the options are exercised and, if documented correctly, the cost of all, or a proportion, of the employer NICs liabilities can be passed to the employees. Although this increases the tax cost for the employee, tax relief is available to the employee for any employer NICs that they pay.

Options are risk-free for employees since no tax liabilities arise on the grant of the options (whether granted as tax-advantaged or unapproved share options) and the employees don’t have to exercise their right to buy the shares but may if they wish.  Options are also favoured by employers since no employer NICs liabilities arise on grant and, as no shares are issued until the options are exercised, they are simple to manage. 

Companies can also incentivise employees by offering employees the opportunity to purchase shares outright.  With careful planning, share arrangements can be implemented so that the purchase price of the shares is relatively low, but any growth in value of the shares is taxed as capital and not subject to income tax or employee or employer NICs.

Consider implementing salary sacrifice arrangements

Salary sacrifice can offer employers a way to reduce their employer NICs liabilities.

This arrangement involves the employee giving up a proportion of their salary (subject to compliance with the National Minimum Wage legislation), or a cash bonus, in return for receiving a specified non-cash tax-free benefit from their employer. The employer therefore benefits from an employer NICs saving in relation to the amount of salary sacrificed.

The benefits to which a tax-efficient salary sacrifice apply have been limited by the introduction, in 2017, of the optional remuneration legislation. However, the benefits which can still be provided to the employee under a salary sacrifice arrangement whilst attracting employer NICs savings include employer contributions into the employee’s pension scheme, the provision of bicycles and cycling safety equipment as part of a cycle to work scheme and the provision of electric vehicles (although low annual benefit-in-kind charges also apply to electric vehicles).

To ensure the sacrifice is effective from a tax perspective and will withstand scrutiny from HMRC, it is important that the change to the employee’s terms of employment is documented, that the documentation clearly reflects the intentions of the employee to sacrifice salary or bonus and that the timing of the sacrifice is considered - it is key to the arrangement that the sacrifice is entered into before the employee’s entitlement to the salary or bonus arises.

Take a different approach to recruitment

Assessing your business’ future recruitment needs could identify projects which are better suited to fulfilment by a self-employed contractor, instead of an employee. The business may realise a saving since the fees payable to a contractor are not subject to employer NICs (unlike salary paid to an employee).

However, it is important that there is a genuine business case for recruiting in this way – employment status is a key area of focus for HMRC and therefore the business must be able to evidence that there is no employment relationship between the business and the contractor.  This applies regardless of whether the contractor is engaged directly by the business or via an intermediary such as a personal services company. 

How can TLT help?

Our Incentives and Employment Taxes team at TLT works with a range of clients including FTSE, AIM, PE backed companies and start-up companies.  The team has a wealth of experience providing clear, commercial advice on all tax and legal aspects of introducing share plans and other short-term and long-term incentive arrangements including salary sacrifice.  Our in-depth knowledge of employee tax allows us to ensure that the arrangements implemented are fit for purpose and deliver the right incentives to your employees.

If you are interested in discussing any of the topics covered in this article, get in touch with our Incentives and Employment Taxes specialists below.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at February 2025. Specific advice should be sought for specific cases. For more information see our terms and conditions.