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November 22, 2024
The recent budget by the newly elected Labour government was eagerly anticipated by many. The party pledged that they would not raise taxes for working people, but to plug holes in the finances, an increase in revenue would have to come from somewhere. It transpired that the increase would be an employer-side increase in National Insurance contributions.
A sigh of relief was heard from employees; after all, this increase won’t make a dent of their pay packet. But it would be shortsighted to assume that these changes won’t impact employees at all. With the cost of hiring an employee set to rise, it remains to be seen how this will impact the future of UK jobs.
Both employers and employees pay National Insurance contributions based on the employee’s salary. It is a percentage earned above the tax-free amount. The self-employed also pay National Insurance contributions, but at a different rate.
National Insurance contributions are required in order to qualify for the state pension. Most people need 35 years of full National Insurance contributions to qualify for a full state pension.
Employers have their National Insurance contributions taken from the salary, along with their tax and other deductions such as their student loan repayments. Employers are also responsible for making NI contributions for each employee.
In January 2024, National Insurance was cut for both employers and employees. This meant that Class 1 employee National Insurance contributions were cut from 12% to 10%. In November 2022, employer contributions were cut from 15.05% to 13.80%. These changes to employer contributions are set to revert back to 15% in 2025.
The threshold for employer contributions is also set to fall from £9,100 per year, or £758 per month, to £5,000 per year, or £417 per month. This means that employer contributions will increase for existing employees, and employers may soon be paying for more of their employees.
For example, if you have an employee currently on £35,000 per year, national insurance contributions for this employee will increase by £924.65 per year to £4,499.38. This is on top of employee contributions of £1,793.92 per year.
A quick glance at the news will reveal that employers are nervous about these increases. To put this into context, a large employer like Sainsbury’s is looking at increases of £140 million per year for their current workforce.
This increase will have to come from somewhere, and it remains to be seen if this could drive price increases, or if it will result in job losses. Employers will face difficult decisions about how to manage these increases. Will they pass these costs on to customers? Will they absorb these costs from their own profits? Or will they seek to reduce their liabilities by cutting jobs?
It’s likely we’ll see a combination of the three, rather than one area absorbing the brunt of the costs. This could mean challenging times ahead for UK businesses trying to meet staffing demands while also navigating increasing costs across the board. This could result in a squeeze on salaries and a reluctance to offer pay rises for existing employees.
With the cost of hiring set to increase, it will be more important than even before for employers to get it right the first time. Employers are likely to become more picky and selective when it comes to new hires, looking for ways to extract more value from workers by looking for those with additional skills.
Recruitment timescales could increase, as employers seek to ensure they are making the right decision before settling on a candidate. It’s also likely that wage increases will be frozen while employers deal with the increase in National Insurance contributions.
This could drive employers to look for other ways to attract workers and make employment contracts more attractive. Offering perks like flexible working, hybrid arrangements and company cars could bridge the gap and help to attract the most in-demand workers.
Employers may also encourage employees to maximise their pension contributions as a way to drive down costs.
Companies looking to expand may find that their plans are put on hold while they navigate these next steps. It’s also possible that employers may look to outsource work overseas or switch to a contractor or self-employment model. By hiring self-employed contractors in part-time roles, there is an opportunity for employers to avoid the additional burden of these National Insurance hikes.
In addition to the National Insurance increases, we’re also facing an increase in the National Minimum Wage and the National Living Wage. These changes are great news for employees who have needed extra support to help with the increasing cost of living. Reducing pressure on minimum wage workers could help to increase productivity by removing the need for second jobs to make ends meet.
Every employer will have to think carefully about how they absorb these costs, and whether they delay growth plans or move forward with confidence. Paying close attention to hiring costs will be essential. It would be wise for companies to make the most of opportunities available to them. For example, the Employment Allowance has increased from £5,000 to £10,500 which could provide some relief to small business owners struggling to pace.
It’s clear that some industries will be impacted more than others. Those that rely on large workforces primarily paid National Minimum Wage will feel the impact of these changes. This could lead to job losses, which will put pressure on remaining staff to pick up the slack. However, if employers choose to absorb the costs without impacting their staffing levels, they could be rewarded with a healthier, happier and more motivated workforce.
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