Budget 2024 and its effect on National Insurance for Employees, Employer and Self Employed with example
The recent UK budget brings important changes to National Insurance Contributions (NICs) for both employers and self-employed individuals starting April 2025. These changes are designed to support the UK government’s fiscal objectives, but they will also affect earnings, expenses, and tax planning for individuals and businesses across the country. Here’s a breakdown of these changes and how they’ll affect employees, employers, and self-employed individuals.
NIC Changes for Employers
Starting April 6, 2025, employers will see a rise in NIC rates and a lowered earnings threshold for contributing, impacting costs per employee:
1. Increased Employer NIC Rate: The rate for secondary Class 1 NIC (paid by employers) will rise from 13.8% to 15%, increasing the cost of each employee’s NIC contribution.
2. Lower NIC Threshold: Employers will start paying NICs on employees’ earnings over £5,000, a reduction from the previous £9,100 threshold. This brings more lower-paid workers within the scope of NICs, raising costs for many employers.
3. Class 1A NIC Increase: The rate for NICs on benefits in kind, such as company cars and accommodation, will also increase from 13.8% to 15%, meaning a higher NIC rate on these non-cash benefits.
4. Employment Allowance Increase: The Employment Allowance will increase from £5,000 to £10,500. Removing the £100,000 cap on employer NIC bills means this allowance will now apply to all businesses, providing some relief for smaller employers by offsetting their NIC liability.
These changes are expected to significantly increase costs for employers, especially those with lower-paid workers, potentially impacting hiring and workforce budgets. Some businesses may need to reconsider benefits or adjust workforce hours to manage the increased NIC burden.
NIC Changes for Employees
The recent NIC adjustments aim to improve take-home pay for employees by reducing their NIC rate:
– Employee NIC Rate: For the 2024/25 tax year, employees will pay 8% on earnings between £12,570 and £50,270, down from 12%. Earnings above this amount remain subject to a 2% rate, helping to increase net income in the face of rising living costs.
Updated NIC Rules for the Self-Employed
For self-employed individuals, the 2025 budget changes simplify NICs by introducing a lower rate for Class 4 NICs and clarifying Class 2 contributions:
1. Class 4 NICs: Self-employed individuals with profits above £12,570 must pay:
– 6% on profits between £12,570 and £50,270.
– 2% on profits over £50,270.
2. Class 2 NICs: Self-employed individuals with profits above £6,725 will now have their Class 2 NICs credited automatically to protect their National Insurance record. No payment is required for Class 2 NIC if profits exceed £6,725, ensuring continued eligibility for benefits and state pensions without additional contributions. Those with lower profits (below £6,725) may choose to make voluntary Class 2 payments to secure these credits.
The updated Class 2 and Class 4 structure aims to reduce the financial burden on self-employed individuals, providing clarity while preserving access to benefits.
NIC Comparison Table: Employees vs. Self-Employed with £18,000 Income
Here’s a comparison of NICs for employees and self-employed individuals earning £18,000 under the new rules starting April 2025:
| Type | Employee | Self-Employed |
| Class 1/4 NIC Rate | 8% on earnings above £12,570 | 6% on profits above £12,570 |
| Class 2 NIC | Not applicable | Credited (no payment required) |
| Total NIC Payment | £434.40 | £325.80 |
Employee NIC Calculation:
– For an employee earning £18,000, the NIC owed will be:
(£18,000 – £12,570) × 8% = £434.40
Self-Employed NIC Calculation:
– A self-employed individual with £18,000 in profits will only owe Class 4 NIC:
(£18,000 – £12,570) × 6% = £325.80
Impact on Small vs. Large Employers
The Employment Allowance has gone up from £5,000 to £10,500, and there is no longer a £100,000 cap. This change will benefit smaller employers the most. However, bigger employers may still face higher National Insurance (NIC) costs because of recent rate increases and lower thresholds.
Small businesses, especially those with a lot of employees, should look into how the higher Employment Allowance could help reduce some of their added NIC costs.
Effect on Low-Earning Employees and Part-Time Workers
The reduction of the employer NIC threshold from £9,100 to £5,000 means that more part-time and low-earning employees will come within the scope of NICs. This change may affect the hiring flexibility of businesses that rely on part-time or seasonal staff.
Employee NICs on Earnings Over £50,270
While the reduction of the primary employee NIC rate to 8% on earnings between £12,570 and £50,270 offers relief, it’s worth noting that the 2% rate on earnings above £50,270 remains unchanged. Higher-income earners may not see a significant impact on their overall NIC contribution, and some could experience a modest decrease in net income.
Implications for Freelancers and Gig Workers
For self-employed people, especially freelancers and gig workers with irregular incomes, the updates to Class 4 and Class 2 National Insurance (NIC) make things a bit simpler. However, freelancers who earn close to the new thresholds should pay attention and plan carefully to understand how these new rates and limits might affect their changing income.
NIC Calculations for Different Income Levels
The example calculation for both employees and the self-employed on £18,000 annual income is helpful. However, providing additional examples for higher income levels, such as £40,000 or £60,000, could show how the NIC obligations change as income levels rise.
Example at £40,000:
Employee NIC Calculation:
£40,000 – £12,570 = £27,430 x 8% = £2,194.40
Self-Employed NIC Calculation:
£40,000 – £12,570 = £27,430 x 6% = £1,645.80
Both groups continue to benefit from the lower primary rate.
Consideration of NIC Effects on Benefits and Pension Credits
For employees and self-employed individuals, maintaining sufficient NIC credits for benefits eligibility is essential. The update to Class 2 NICs, allowing those above £6,725 in profits to be credited without payment, simplifies this process for self-employed individuals. However, employees and those with lower earnings should verify that they meet the NIC requirements for state pension credits.
Tax Planning for 2025 and Beyond
Both employees and self-employed individuals may want to seek financial planning advice to ensure they are aware of their post-2025 NIC obligations. Employers, especially those with large workforces, might need to explore strategies for managing increased NIC costs, including potentially restructuring benefits or adjusting compensation models.
Impact on Gig Economy and Part-Time Workers’ Flexibility
Lowering the threshold for employer NIC contributions will also bring many part-time and gig economy workers into the NIC scope. This could affect employers’ cost considerations and hiring strategies in industries with fluctuating demand and reliance on flexible workers.
Higher Income Example – Employee Earning £60,000
Employee NIC Calculation:
For an employee earning £60,000, NICs would be calculated as follows:
(£50,270 – £12,570) x 8% = £3,020 on income up to £50,270, plus (remaining £9,730 x 2% = £194.60).
Total NIC Payment: £3,214.60.
Higher Income Example – Self-Employed with Profits of £60,000
Self-Employed NIC Calculation:
Class 4 NICs: (£50,270 – £12,570) x 6% = £2,264.40, plus remaining profits (£9,730 x 2% = £194.60).
Total NIC Payment: £2,459.
Summary
These NIC changes reduce the tax burden on employees and self-employed individuals, especially those with lower to middle incomes, while shifting more responsibility onto employers. Employers may need to adjust budgets and benefits due to the increased NIC rate and lowered threshold. Meanwhile, the self-employed will see simplified NIC payments while maintaining access to essential benefits.