Autumn Budget: how Labour might change employers’ NI contributions

Most people know if they are a basic or higher-rate taxpayer. But lots of us aren’t sure exactly how much National Insurance (NI) we pay, due to the complicated way this is structured, with different NI classes and earnings bands, often relating to a notional weekly salary.

But it is the second biggest tax generator for the government, and as a result often a target for chancellors looking to raise significant revenues, while claiming not to have increased headline rates of Income Tax.

The Labour government appeared to be avoiding such sleights of hand, having pledged not to raise Income Tax, National Insurance or VAT in its election manifesto. However it has now emerged that this promise does not necessarily cover employers’ National Insurance payments.

Senior government ministers have refused to rule out increasing the rate at which employers pay NI in next week’s Budget. There is also speculation that Rachel Reeves could change the rules so employers have to pay NI on pension contributions.

Neither will directly increase costs for individuals, but if employers see a significant increase in NI costs, there could be knock-on effects for employees that could negatively impact their finances. 

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How does National Insurance work?

National Insurance is a tax paid on earnings that is paid by employees, the self-employed and employers. Those who don’t work can also make voluntary National Insurance contributions (NICs) to ensure they fully qualify for a range of state benefits, including the state pension.

Once the state pension age is reached, individuals don’t pay NI, even if they remain in the workforce. Unlike Income Tax, NI is not charged on other sources of income, for example pensions, savings or from property.

There are four main types or ‘classes’ of NI: Class 1 is paid by employees and employers, Class 2 and Class 4 are related to self-employed earnings, and Class 3 NICs are voluntary contributions made to top up NI records.

Like Income Tax, different rates apply depending on earnings bands, with an initial allowance on which no NI is due. However, unlike Income Tax the rate of NI paid on the highest levels of earnings is lower than the main band.

The main NI rates are given below: 

Employees (Class 1 NIC)

Weekly earnings:
£0–£242 - 0% (up to £12,584 annual earnings)
£242.01–£967 - 8% (between £12,584 and £50,284 annual earnings)
Over £967 - 2% (over £50,284 annual earnings)  

Employers (Class 1A or 1B NIC)

Annual earnings (based on employee’s salary):
£0–£9,100 - 0%
Over £9,100 - 13.8%

Self-employed

Annual trading profits:

£0–£6,724 - 0% (but can make voluntary payments)
£6,725–£12,569 - Don’t need to pay but counted as making Class 2 NICs for benefits record
£12,570–£50,249 - Class 4 NICs at 6%
Over £50,270 - Class 4 NICs at 2%

How do you pay NI?

As employees, most people pay Class 1 NICs. These are deducted directly from salary via PAYE. This NI is taken alongside Income Tax, so most people do not really see it as a separate payment, although both will be listed separately on payslips. Self-employed people paying Class 2 or Class 4 NICs will pay these through their self-assessment returns.

What about employers?

This is where NI differs from Income Tax. Employees pay Income Tax and NI on their earnings. Employers pay corporation tax on their own profits but also pay NI on staff salaries. This is currently set at 13.8% on salaries over £9,100 a year and includes those over state pension age. It also does not reduce once the salary reaches an amount broadly equivalent to the higher-rate tax threshold, as it does for employees and the self-employed.

However, this £9,100 threshold is higher for employees under 21 and apprentices under 25. It’s also worth noting that some smaller employers can get an employment allowance to help reduce their bill.

What might change in the Budget?

Reeves could simply raise the employer NI rate. It is estimated that if this went up by 1 percentage point, to 14.8%, it would raise a further £8.5bn in the next tax year, and more in subsequent years as salaries rise. Alternatively, she could lower the threshold at which NI is paid or do a combination of both.

It has also been widely reported that the chancellor will require employers to pay NI on pension contributions. This could raise significant funds without increasing the overall NI rate.

Employers now have to make pension contributions for staff under auto-enrolment, with the minimum level being 3% of the employee’s relevant salary, although some employers make larger contributions into these company pension schemes.

The Institute of Fiscal Studies (IFS) reckons that if employers have to make NI payments on these contributions, it would raise £17bn for the Treasury, an amount that would certainly make a sizeable dent in what Labour has described as a £22bn black hole in the nation’s finances.

Of course, this would be hugely expensive for both smaller and larger employers. The costs would also be higher for employers who support staff with more generous pension payments, as they would be paying 13.8% (or whatever the prevailing NI rate is) on a larger sum.

It is possible the chancellor may adopt a halfway house approach, charging a lower NI rate on pension contributions. This would be less punitive but would still mean bigger NI bills for employers.

It’s also worth remembering that the government is also one of the country’s larger employers. But it has been suggested that the government may shield public sector employers such as schools and hospitals to protect their budgets.

How might this affect employees?

If employers face increased NI costs, this may impact their ability to take on new staff or pay future salary increases.

There are particular concerns that NI costs on pension payments may lead some firms to scale back contributions to just the legal minimum, potentially impacting people’s retirement savings over the longer term.

A cut in pension contributions could help employers offset the cost of higher NI payments, but ultimately it will be the employee who loses out, as they will have less going into their pension pot.

It could also put the future of ‘salary sacrifice’ schemes in jeopardy. These schemes allow employees to divert a portion of their wages into the pension plan.

This can be highly tax-efficient, as the employee doesn’t pay Income Tax or NI on these contributions, and the employer also makes an NI saving. For the employee, salary sacrifice means a lower take-home, but their overall remuneration increases, as they are paying less tax and NI, with these additional savings being redirected into their pension pot.

While the employee benefits will remain the same, employers may be less inclined to offer these arrangements if their NI saving is removed or significantly reduced.

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