Significant changes are coming for Employer National Insurance contributions (NICs) and the Employment Allowance from April 2025. These adjustments, announced in the October 2024 Budget, will impact businesses across the UK, particularly small and medium-sized enterprises. 

Let’s delve into the key changes and see what they mean for businesses.

Background and context

The Employment Allowance, introduced in 2014, has been a valuable tool for small businesses to reduce their employer NICs. It’s part of the Government’s strategy to support employment and reduce the financial burden on smaller employers. The upcoming changes for the 2025/26 tax year are the most substantial since the scheme’s inception.

Key changes to Employment Allowance

1. Increased Allowance Amount – From April 2025, the maximum Employment Allowance will increase from £5,000 to £10,500 per year. This significant boost will allow eligible employers to offset a larger portion of their NICs liability.
2. Removal of the £100,000 Eligibility Threshold – Currently, employers with a secondary Class 1 NICs liability exceeding £100,000 in the previous tax year are ineligible for the Employment Allowance. This restriction will be removed from April 2025. As a result, many more businesses will be able to claim the allowance, regardless of their NICs liability in the previous year.
3. Changes to NICs Rates and Thresholds – While not directly related to the Employment Allowance, it’s important to understand these changes as they impact overall NICs liability:
   • The secondary (employer) NICs rate will increase from 13.8% to 15%.
   • The secondary threshold will decrease from £9,100 to £5,000 per annum.

Implications for businesses

These changes will have mixed effects on businesses:

1. Increased NICs Liability: The higher NICs rate and lower threshold mean many employers will face increased NICs costs.
2. Greater Relief for Small Businesses: The doubled Employment Allowance will provide more substantial relief, potentially offsetting the increased NICs for smaller employers.
3. Expanded Eligibility: More businesses will be able to claim the allowance due to the removal of the £100,000 threshold.

Practical steps for business owners

1. Review Your Eligibility: Even if you weren’t eligible in previous years, you may qualify for the Employment Allowance from April 2025. Check the updated criteria carefully.
2. Update Your Payroll Systems: Ensure your payroll software is updated to reflect the new NICs rates and thresholds.
3. Plan for Cash Flow Changes: The increased NICs liability may impact your cash flow. Factor this into your financial planning for the 2025/26 tax year.
4. Consult with Experts: The interplay between increased NICs and the higher Employment Allowance can be complex. Consider seeking professional advice to understand how these changes will affect your specific situation.
5. Prepare for Increased RTI Reporting: Be aware that the lowering of the secondary threshold will lead to increased Real Time Information (RTI) reporting obligations.

Claiming process simplification

The claiming process for the Employment Allowance will be simplified for the 2025/26 tax year. Previously, employers had to consider state aid rules when making a claim. However, this requirement has been removed.

When making a claim, you’ll only need to populate two fields in your RTI submission:

1. The employment allowance indicator
2. State aid rules do not apply to employer

While some payroll software may still include state aid questions, these no longer need to be answered.

Conclusion…

The changes to the Employment Allowance and NICs for the 2025/26 tax year present both challenges and opportunities for small businesses. While the increased NICs rate and lower threshold may increase costs for some, the doubled Employment Allowance and expanded eligibility could provide significant relief, especially for smaller employers.

As April draws closer, it’s crucial to stay up to date on these changes and how they’ll impact your business. If you have any questions about how these changes will affect your situation or need help in preparing for the new payroll year, your first port of call is your payroll provider, if you have one. Otherwise, please get in touch; we’re here to help!