On 30 October 2024, Rachel Reeves, the UK’s first female Chancellor of the Exchequer, presented the Labour Party’s first budget in over 14 years. Her Autumn Budget, delivered amidst economic pressures and fiscal challenges, included significant changes to National Insurance Contributions (NICs) for employers. This bold move reflects Labour’s commitment to addressing the nation’s fiscal deficit while supporting small businesses and workers through an increase in employment allowance.
Key Changes to Employer National Insurance Contributions (NICs)
The Budget introduces an increase in the rate of Employer NICs, rising from 13.8% to 15% starting from April 2025. This change is expected to generate substantial revenue, estimated to raise £25 billion annually by the end of the forecast period. Reeves justified this measure as necessary to repair the country’s public finances, which she attributes to a deficit left by the previous Conservative administration.
- New NICs Rate: The employer NIC rate will increase by 1.2 percentage points, resulting in a 15% contribution from employers on eligible earnings.
- Lowered Secondary Threshold: The threshold at which employers begin paying NICs will be reduced from £9,100 to £5,000, expanding the taxable base and increasing revenue generation.
While this measure has received support for its fiscal prudence, it has also faced criticism, particularly from the opposition, who argue that increasing employer costs could dampen economic growth and burden businesses.
Impact on Small Businesses and Employment Allowance Increase
To offset the additional costs for small businesses, Reeves announced a significant increase in the Employment Allowance, raising it from £5,000 to £10,500. This allowance permits eligible businesses to reduce their NIC bills and now applies to a broader range of businesses, as the £100,000 cap on NIC bills has been removed.
This increase in employment allowance is expected to shield around 865,000 small businesses from the new NIC hike, which is crucial for maintaining their financial stability amidst rising operating costs.
Economic Rationale and Revenue Expectations
The changes to employer NICs are expected to provide a substantial boost to the Treasury, accounting for a large portion of the £40 billion targeted to fund day-to-day government spending. According to the Office for Budget Responsibility (OBR), this measure will impact employment costs by nearly 2%, a cost that businesses may pass on to employees through lower real wages.
Reeves argued that the NICs adjustment, though challenging for businesses, is essential for fiscal responsibility, stating, “We are asking business to contribute more and I know that there will be impacts… But in the circumstances I have inherited, it is the right choice to make.” Public sector employers, such as the NHS and government departments, will be reimbursed to avoid reducing service levels.
Potential Implications for Businesses and Workers
The increased cost burden on employers is anticipated to have a ripple effect across the labour market:
- Payroll Costs: The NICs rise will elevate employment costs, which may lead some employers to re-evaluate hiring practices.
- Wage Implications: The OBR has noted that firms may pass these increased costs onto employees through adjusted wages, affecting disposable income.
- Off-Payroll Market: The change will also affect umbrella companies and personal service contractors, particularly those in sectors that rely heavily on temporary or contract work, potentially leading to a rise in contract rates to offset NIC increases.
Opposition Response and Criticism
The Conservative opposition has voiced concerns that the NICs increase violates Labour’s election promise not to raise taxes on “working people.” Reeves defended her decision, referencing necessary corrective measures after what she characterised as prior unsustainable tax reductions by the Conservative government.
In her Budget speech, Reeves cited previous reductions in National Insurance contributions for employees and self-employed workers, asserting that these reductions were “not honest” as they were based on overly optimistic forecasts.
Long-Term Effects on the Labour Market
While this budget aims to bring fiscal responsibility and safeguard public services, the increased burden on businesses may have longer-term implications for employment and wage growth. Industry analysts warn that small businesses, particularly in low-margin sectors, may face the toughest challenges. However, the boost in Employment Allowance may serve as a lifeline for many small enterprises, allowing them to manage their NIC obligations without cutting back on staffing.
Conclusion
Chancellor Rachel Reeves’ Budget marks a historic shift in UK economic policy, reinforcing Labour’s position on balancing social equity with economic growth. With significant changes to National Insurance Contributions and targeted relief for small businesses, this budget outlines Labour’s vision for economic recovery and fiscal prudence.
As businesses adapt to these changes, the increased NICs rate and lower threshold will reshape the UK’s employment landscape, impacting both employers and employees. The budget has set the stage for Labour’s economic policy direction, promising financial resilience and support for workers and small businesses alike.
For a detailed analysis of how these changes may affect your business or for personalised tax advice, consult with Jack Ross Chartered Accountants. You can contact us at 0161 832 4451 or visit www.jackross.com to book a free no-obligation introductory meeting with one of our tax advisers.