Autumn Budget 2024 - Impact of the increase in National Insurance Contributions on the Financial Services sector

2 December 2024

Chancellor Rachel Reeves' Autumn Budget contained a sizeable increase in employers' national insurance contributions (NICs). This article examines how this will impact the Financial Services sector's tax cost and compliance requirements.

National insurance

Financial services rely heavily on human capital, so payroll is a major cost. Since employers' NICs have no upper limit, employers in the sector will have significantly higher total payroll costs, starting from 6 April 2025. The key changes are:

Employers' class 1 secondary, class 1A and class 1B NIC rates rise from 13.8% to 15%.
The class 1 secondary allowance (the amount employees can earn before employers' NIC becomes payable) is cut from £9,100 to £5,000. For most employees, their employers will suffer an additional class 1 NIC liability of £615 a year (£4,100 x 15%), plus the additional 1.2 percentage points increase on the remainder of their income. The £5,000 threshold is fixed until 5 April 2028.
To mitigate the impact of the NIC rise, the employer's employment allowance (EA) will rise from £5,000 to £10,500 and all businesses will be able to claim this. Only a single allowance is available to a group.

According to the Office of Budget Responsibility's forecasts, the NIC changes comprise most (£25bn) of the £41bn in additional taxes the government expects to raise annually.

Implications for employers

The rise of employers' NIC may incentivise financial services businesses to rely more on off-payroll workers, such as contractors and freelancers. This is a sensitive area – it can save tax where the off-payroll status is justified, but carries the risk of IR35 tax (meaning the financial service business could be a deemed employer and liable for PAYE and NIC on amounts paid and associated administration), penalties and late payment interest if it is not.

Some positive news is that pre-budget rumours about potential restrictions on employers' NIC relief on pension contributions did not materialise. This means businesses can still contribute to employees' retirement savings without facing additional NIC costs.

The abolition in 2023 of the bankers' bonus cap and the Bank of England's proposal in October 2024 to reduce the deferral period for senior bankers' bonuses mean that review of bonus arrangements is topical among banks. They and other financial services businesses may benefit from focusing on the NIC impact of their remuneration packages. Pay, benefits and expenses can all contribute to the NIC liability. As the announced increase in employers' NIC does not take effect until April 2025, now is a good time for employers to start reviewing their workforce structure, pay and benefits packages and travel and expense policies to identify potential cost-saving opportunities while continuing to deliver value to employees.

How can employers manage increased NIC costs?

Financial services businesses can manage their NIC costs using two types of approaches:

Cost reduction.
Worker types for NIC purposes.

Cost reduction

This approach includes:

Salary sacrifice – this is where an employee forgoes part of gross salary in exchange for certain non-cash benefits, reducing the salary on which tax and NIC are payable. Under current legislation, benefits including pensions, low-emission vehicles and cycle-to-work schemes are eligible for tax and NIC relief arising from these arrangements.
Bonus waivers – where an employee agrees to forgo a bonus which has become due, and instead it is invested in their pension, the bonus does not go through payroll and is not subject to tax and NIC deductions. The employer saves the NIC it would have paid on the bonus.
Equity incentives – tax-advantaged employee plans can reward employees based on future share price growth while mitigating income tax and NIC. Companies can choose between all-employee plans, such as share incentive plans (SIPs) or save-as-you-earn (SAYE) arrangements, or discretionary plans, such as company share option plans (CSOPs) and enterprise management incentives (EMIs). However, many financial service activities (such as banking, insurance, lending, debt-factoring, hire purchase and leasing, as well as some service providers to such businesses) are excluded from the EMI regime. Other types of non-tax advantaged equity reward arrangements may also offer the opportunity to limit employment costs, though these usually involve employees accepting extra risk and mean existing equity holders could have their interests diluted.

Worker type

The second approach is to look at worker types for NIC purposes.

Employee NIC categories – for some categories, the employer can benefit from relief. These are:
- Category H – Apprentices under 25.
- Category M – Employees under 21.
- Category V – Armed forces veterans employed in their first role post-retirement from the service.
Employers' NICs for these workers are due only on earnings above the upper earnings limit (£4,189 a month or £50,270 a year). Employers with workers in these categories should review their NIC status and adjust their category if they have been misclassified.
Businesses may assess how better to incorporate qualifying apprenticeships into their organisation, as this will mitigate NIC cost, and allow draw-down on the apprenticeship levy 'pot' available (or co-investment funding with the government).

Ultimately, a comprehensive review of employees' compensation will help employers navigate the employers' NIC increase coming on 6 April 2025. By taking a strategic approach, financial services businesses can mitigate their NIC costs and continue to thrive in the evolving economic environment.

Looking ahead

All financial services businesses will be adversely affected by the rise in Class 1 employers' NIC from 6 April 2025. Careful planning of employee remuneration packages, as well as proper categorisation of staff, can help to reduce the impact of this burden.