The Autumn Budget 2024 has introduced some big changes to the UK’s National Insurance Contributions (NIC) that employers should know about – especially if you’re a small business owner, running a company with just a few employees, or managing a limited company with only one director on payroll.
These changes affect the NIC threshold, bring a new set of rules for the NIC holiday, and could lead to some unexpected costs for smaller companies. To help you wrap your head around the changes, we’ll break down what’s new, what it could mean for your business, and how you can adapt to these updates.
The NIC threshold just dropped but what does that actually mean?
If you’re an employer, NICs are one of those necessary costs that help fund state benefits like pensions, healthcare, and other services. In simple terms, NICs are the contributions employers pay to the government based on employee wages, but they only kick in once wages pass a certain amount, or “threshold.”
The big news from the Autumn Budget is that the employer NIC threshold has been reduced from £9,100 to £5,000. This means that as soon as an employee earns over £5,000, employers now start paying NIC on those wages. It’s a significant drop that could lead to higher NIC costs even for small businesses that don’t pay very high wages. If you’re running a small business and juggling payroll expenses, this change is likely to impact you, so it’s important to take note of this change.
The NIC holiday got an upgrade but how can it help?
To balance things out a bit, the government has also increased the NIC holiday to £10,000. So, what does that mean? The NIC holiday is a kind of “relief” that lets certain employers avoid paying NICs on wages up to £10,000. For small businesses with up to four employees earning minimum wage, this NIC holiday is a great way to manage costs by avoiding NIC payments altogether up to that limit.
However, it’s really important to be aware that this relief doesn’t apply to companies with only one director on the payroll. So, if you’re a single-director limited company (with no other employees), this holiday won’t apply to you leaving some smaller businesses, unfortunately, out of the benefit zone.
Single-director payrolls
If you’re a single director on payroll, this NIC threshold reduction means you might end up paying more NIC. Without eligibility for the NIC holiday, any wages you draw above £5,000 will be subject to NIC, which could lead to a bump in costs.
While it might be tempting to lower your salary below the threshold to avoid NIC, this strategy has some downsides to keep in mind. Setting your pay too low could mean missing out on a “qualifying year” toward your state pension. Over time, too many missed qualifying years could reduce the pension you’re entitled to or affect other state benefits. So, while lowering your salary might seem like a simple fix, it’s worth weighing the pros and cons very carefully. The limit for a qualifying year will be £6,500 in the 2025/26 tax year and therefore in this scenario, you would be paying some National Insurance contributions.
The new 15% NIC rate: What’s the impact?
The NIC rate has also increased from 13.8% to 15%, which will further increase employer contributions. Although this change might seem small, when applied across your entire payroll, it could add up to significant additional costs. For instance, if your payroll costs include staff salaries, director pay, and bonuses, these costs will all now be subject to the 15% NIC rate.
Are you better off? Comparing old and new NIC costs
To put these changes into perspective, we’ve got a few examples below of how the new NIC costs could impact you:
Example 1
Old rates:
- NIC costs for a business paying £596.90 per month in NIC for staff (x12 months), plus additional costs for directors, totalled £8,120.16.
- Old NIC allowance: £5,000
- Total cost after allowance: £3,120.16
New rates with Autumn Budget changes:
- NIC costs now rise to £12,514.30 due to the increased 15% rate and lowered threshold.
- New NIC allowance: £10,000
- Total cost after allowance: £2,514.30
In this example, your business could actually save £605.86 annually.
Example 2
Old rates:
- Monthly NIC for one Director: £478.86
- NIC allowance: £0
- Total cost after allowance: £478.86
New rates with Autumn Budget changes:
- Monthly NIC for one Director: £1,135.5
- NIC allowance: £0
- Total cost after allowance: £1,135.5
In this example, you would lose £656.64.
Example 3
Now here’s an example with two Directors.
Old rates:
- Monthly NIC for Director 1: £478.86
- Monthly NIC for Director 2: £478.86
- Total monthly NIC: £957.72
- NIC allowance: -£957.72
- Total cost after allowance: £0
New rates with Autumn Budget changes:
- Monthly NIC for Director 1: £1,135.5
- Monthly NIC for Director 2: £1,135.5
- Total Monthly NIC: £2,271
- NIC Allowance: -£2,271
- Total Cost After Allowance: £0
In this example, the difference in total monthly NIC costs after allowance would be £0.
Keep in mind that these examples are guides only, and that your final outcome will depend on specific payroll details, so consider calculating your own figures based on these new rules. If any of your employees are on minimum wage, their pay will also need to be increased to the new minimum wage level.
Actionable tips for small business owners to prepare for the NIC changes
Knowing about the changes is only part of the process, you also need to get prepared for them. Here are a few ways you can approach these NIC updates to keep your payroll costs manageable while still keeping an eye on your future benefits:
Review your payroll strategy
Check your payroll setup to see how the new threshold affects your NIC costs. If you have multiple employees, the NIC holiday could be a helpful tool to manage expenses.
Consider your salary carefully
For single-director companies, it’s all about balance. Try setting a salary that’s tax-efficient without dropping below the qualifying threshold for state benefits. The goal is to optimise your payroll without jeopardising your pension or state entitlements. This of course is a balancing act between paying more corporation tax and indeed more in dividend tax, so always worth a discussion with your accountant.
Re-evaluate your business structure
With these NIC changes, it might be a good time to consider whether your business structure is still the best fit. For small operations with limited payroll, a sole trader setup might make more financial sense than a limited company. This isn’t only about the numbers — non-financial factors like liability protection come into play too. Running a quick comparison with the new NIC rules in mind could help you decide if your current structure is still right for you or whether you need to make a few tweaks.
Talk to a tax advisor
These NIC changes introduce a few new complexities, so if you don’t feel confident handling these updates yourself, it’s definitely a good idea to get advice from a professional. A tax advisor or an accountant can help you make sense of the changes and develop a payroll strategy that keeps your costs low without missing out on benefits.
Need some extra help managing your business finances in the wake of the Autumn Budget 2024? Talk to our friendly team today, we’d love to help!
