Our expert UK People Solutions team dives into the key updates from the recent UK Autumn Budget 2024 (opens a new window) (the ‘Budget’) and offers valuable insights into how these policy changes could impact you and your business.
By far the most significant of these is the increase to employers’ National Insurance contributions (NIC) from 6 April 2025, which for many employers is set to make the cost of employment more expensive.
Fortunately, tools are available for employers to offset the cost of the increases. Below, we take an in-depth look at these tools, and how a long-term action plan can help to tackle broader people risk.
Key details
Increases in employer NIC rate and employer National Insurance (NI) threshold
There are two significant increases around NI that employers will have to consider, both of which are due to apply from 6 April 2025:
Employer NIC will increase from the current rate of 13.8% to 15%; and
The per-employee threshold at which employers become liable to pay NI will be reduced from GBP 9,100 per year to GBP 5,000 per year.
Lockton Comments: With the reduction to the threshold at which employer NIC kicks in, employers will see an average increase of 1.2% increase on their contributions from 6 April 2025. For many employers, the full cost of the increase in employer NIC is far greater than headline figures suggest. This is before factoring in the increases in Minimum National Wage and National Living Wage.
According to latest UK Government data (opens a new window), the average UK weekly wage is GBP 693 per week, equivalent to GBP 36,000 per year. If we use this figure to compare the current employers’ NIC costs scenario with the future costs once the increase in employer NIC comes in, the impact becomes clear:
Current costs scenario | Costs from 6 April 2025 | |
Average pre-tax UK salary (as of November 2024) | GBP 36,000 | GBP 36,000 |
Employer NI threshold | GBP 9,100 | GBP 5,000 |
NI-applicable salary | GBP 26,900 | GBP 31,000 |
Total employer NIC costs | GBP 3,712.20 | GBP 4,650.00 |
% of average UK salary | 10.31% | 12.92% |
For many employers, this amounts to an increase in annual costs to UK employers of GBP 937.80 per employee, or 2.61% of the mean average UK salary.
With wage growth currently running at 4.9% (1.7% over the current rate of inflation) and the significant increase in employer NIC to come, it is highly likely that we will see wage growth drop to cover the NIC increase.
Although the increase in employer NIC has no direct impact on employees, employers may look to recover the additional NIC costs by reducing employer pension contributions (where they are more generous than the statutory minimums), or by making changes to other employee benefits.
Employers who currently use salary sacrifice may look to alter this to mitigate their increased costs. Employers who are looking to make these changes may wish to take advice regarding the need for employee consultation. See ‘Lockton Comments: The impact on employers’ people strategy’ below for more information.
Increase in Employment Allowance and removal of GBP 100,000 eligibility threshold
The current Employment Allowance gives employers with employer NIC liabilities of GBP 100,000 or less a discount of GBP 5,000. From 6 April 2025, the Employment Allowance will increase from GBP 5,000 to GBP 10,500. The GBP 100,000 eligibility threshold will also be removed, so most employers will be able to claim the Employment Allowance. Eligibility criteria include being a business or charity, but there are certain exclusions (opens a new window) that will continue to apply.
According to HMRC modelling, this means that 865,000 employers will pay no employer NIC next year, and more than half of employers will see either no change or pay lower NIC costs.
Inheritance tax will be charged on ‘unspent pension pots’ from April 2027
Unspent pension pots will be brought into the scope of inheritance tax from April 2027.
The impact of this change will depend on the type of pension in place, and whether an income has already started to be paid. Most public sector pensions are ‘defined benefit’ (also known as ‘final salary’) arrangements that typically pay a lump sum and a dependent’s pension on death. These pensions are less likely to be impacted by the Budget.
By contrast, ‘defined contribution’ pensions are more likely to be impacted. These pensions (group personal pensions, Master Trust, Own Occupational trust and personal pensions, SIPPs), currently allow the accumulated pension fund to be passed to an employee’s dependents free of income tax if paid as a lump sum upon the employee’s death before age 75. If the inherited fund is paid as an income to a dependent, it is liable to income tax at the recipient’s marginal rate.
Registered or excepted group life assurance benefits, which are paid via a discretionary trust, should continue to fall outside of the deceased’s estate. As such, these schemes should not be impacted by the Budget.
Separately, the Budget extended the freeze on inheritance tax thresholds until 2030.
Lockton Comment: While the change to inheritance tax has less impact on employers, it ultimately remains an employee consideration. The challenge for employers will be how to communicate any change to pension schemes and manage the subsequent impact on employee engagement.
Personal taxation thresholds will increase by inflation annually from the 2028/2029 tax year
Until 2028/2029, there will be no change to the current income tax threshold for employees. UK employees can earn GBP 12,570 before paying income tax at basic rate of 20%. The higher rate (40%) and additional rate (45%) tax threshold levels will remain at GBP 50,270 and GBP 125,140 respectively. This excludes Scottish taxpayers.
Other announcements
As a reminder, the following changes have already been announced and should be considered in budgeting for the forthcoming year.
Changes to Minimum National Wage and National Living Wage
From 1 April 2025, the National Living Wage paid to employees over 21 will go up by 6.7% from GBP 11.44 to GBP 12.21 per hour, while the National Minimum Wage for 18 to 20-year-olds will see a 16% increase, from GBP 8.60 to GBP 10.00 per hour. Under 18s and apprentices will see the largest rise of 18%, with hourly pay increasing from GBP 6.40 to GBP 7.55.
State Pension
The UK Government remains committed to the triple lock, which increases the state pension by the highest of average earnings growth, inflation, or 2.5%. As a result, the basic state pension will increase by an additional GBP 470 in 2025-26. Pension credit will increase from GBP 11,400 to GBP 11,850 per annum for a single pensioner.
Please note: the above summary covers the main aspects from the Autumn 2024 Budget that will affect employers. It excludes changes to allowances, capital gains tax, fuel duty etc. that may impact employees’ personal circumstances.
Lockton Comments: The impact on employers’ people strategy
For employers, these changes are likely to require a substantial shift in their overall people strategy:
Employer NIC will increase from 6 April 2025, so there is not long to prepare.
The new inheritance tax charge on unspent pension pots brings engagement challenges, with an even greater need for advice around retirement planning in the coming years.
Hiring staff will become more expensive. Employers’ focus is likely to move from recruitment to retention to ensure key talent stays within the organization.
Benefits costs will need optimizing to ensure ‘bang for buck’.
De-duplication and optimization will become the watchwords into 2025.
Many businesses will likely absorb some of the additional costs, but others will need to look at ways to pass them on. Particularly in the initial stages, much of this is likely to fall on customers. Over time, however, employees are likely to feel the greater effects, by way of a restriction on wage growth over the coming years.
The benefit of salary sacrifice
The most immediate and obvious way that businesses can reduce their employer NIC is by taking advantage of salary sacrifice benefits.
Employee benefits via a salary sacrifice arrangement provide an opportunity for a reduction in Employer Class 1& 1A NIC. These reductions are primarily realized through the employee giving up a proportion of gross salary to obtain the benefit, which leads to a subsequent reduction in employer NIC liability from the lower salary. A NIC saving can also be obtained through more favorable Benefit in Kind taxation rates for certain benefits, such as electric vehicles.
The key employee benefits that can generate an employer NIC savings are:
Pension salary sacrifice – the most beneficial form of salary sacrifice. While popular, there are still a number of employers who do not take advantage of this mechanism, and are therefore already missing out on the potential savings.
Electric vehicle leasing – a notable opportunity for employers to mitigate NIC increases, with relatively low employee utilization and high values generating significant levels of salary exchange.
Cycle to work – a popular benefit among employees, albeit generating lower levels of salary exchange.
Additional holiday purchase – reasonable employee uptake, but with limited scope to the levels of salary exchange.
Childcare vouchers – closed to new entrants from October 2018, with savings restricted to those already realized.
Employers who offer pension salary sacrifice on an ‘opt in’ basis should consider a switch to automatic enrolment for new joiners. They should also look to communicate the benefits of salary sacrifice to existing employees who are not taking advantage of the mechanism.
Some employees will no doubt see this as a reaction from their employer to the additional employer NIC costs. However, employers should not be afraid of being open and honest about this, and focus on educating those employees on the significant savings an employee can make also. As ever, communication will be key.
Revisiting the case for benefits
Cost of employment is likely to be at the top of the business agenda for many years to come. Although businesses should explore salary sacrifice as soon as possible, the UK Government may introduce future measures to curtail or remove this mechanism. Therefore, it is vital to revisit the business case for benefits at the earliest opportunity.
In practice, this means undertaking a review of your existing benefits, and creating a plan for what you need and want from your benefits in the year ahead. You may want to ask the following questions:
Where are you now?
What does benefit engagement look like? Do your benefits meet your workforce needs? Where are the gaps? Do you have duplications?
Where do you want to be?
A better employee value proposition? A total-reward model? Better data insights? Greater cost control?
How can you get there?
Do you have the knowledge or expertise to support you on your journey?
Further Information
Visit our Lockton UK People Solutions (opens a new window) page for more information about what the budget means for you and your business, or reach out to your Lockton Global People Solutions team.
