Small Business Service

Employer’s Class 1 National Insurance update

The recent budget announcement brings significant changes to Employer’s Class 1 National Insurance and other related contributions, effective from April 6, 2025. These changes are set to impact small businesses, and understanding their implications is crucial for effective financial planning.

Here we look at the details of the changes and offer insights for employers and self-employed individuals.

18th December 2024


Employer’s Class 1 National Insurance

As an employer, you currently pay 13.8% Employer’s Class 1 National Insurance (NI) for employees earning over £9,100 annually. However, starting April 6, 2025, the following changes will take effect:

Increase in contribution rate:

The current rate of 13.8% will rise to 15%.

Lower secondary threshold:

The threshold for paying Class 1 NI will reduce from £9,100 to £5,000.


Impact on small businesses

Small businesses, which presently enjoy a £5,000 employment allowance against their NI liability, will see this allowance increase to £10,500. Moreover, the existing £100,000 liability threshold for claiming this allowance will be removed, making it accessible to more businesses.


Example

To understand the financial impact of these changes, let’s consider a practical example:

Result: An additional NI cost of £865.80 per employee earning £30,000.

However, businesses with fewer than six employees earning similar salaries may offset these costs due to the increased employment allowance, potentially benefiting smaller organisations.


Changes for the self-employed: Class 2 and Class 4 NI

Self-employed individuals will also experience adjustments to their National Insurance contributions:

Profits Under £6,725:

          – No obligation to pay NI.

          – Class 2 contributions can be made voluntarily to qualify for a state pension year.

Profits Between £6,725 and £12,570:

          – No Class 4 NI is payable.

          – Class 2 is treated as paid, ensuring a qualifying year for state pension.

Profits Between £12,570 and £50,270:

          – No Class 2 NI is payable but treated as paid.

          – Class 4 NI of 6% applies to profits over £12,570.

Profits Over £50,270:

          – Class 4 NI of 6% on profits up to £50,270 and 2% on profits exceeding this amount.

          – For the 2024/25 tax year, the Class 2 NI rate is set at £179.40 annually.


Exemptions to note
  • Under-21 Employees: No employer NIC for salaries up to £50,270.
  • Apprentices Under 25: NIC exemption applies up to £50,270.
  • Veterans: Employers hiring veterans can benefit from a similar exemption.
  • Freeports and Investment Zones: Employers in these areas maintain a higher salary threshold of £25,000 for NICs, subject to specific criteria such as location and employment start dates.

What this means for your business

The changes aim to balance contributions with allowances, benefiting small businesses while imposing higher costs for larger workforces. Employers with fewer employees may find the increased employment allowance advantageous. Meanwhile, self-employed individuals must consider the revised thresholds and rates when planning their finances.


We’re here to help

These changes can be complex, but preparation is key. If you’re unsure how the new regulations will affect your business, consulting a financial adviser or tax expert is highly recommended. The Small Business Team at Old Mill is available to assist with tailored advice and support. Get in touch here