The recent budget announcement brought several significant updates to payroll and tax regulations, most notably to Employers’ National Insurance Contributions and the National Minimum Wage – both of which will have a significant impact on employers’ wage bills. Here’s a breakdown of the key changes and their potential impact:
National Insurance
For employees, there are no changes to rates or thresholds. However, employers face significant changes.
While an increase in employer NI contributions was expected following media speculation – and an increase from 13.8% to 15% was confirmation – businesses were not expecting the announcement that the threshold for which employers pay NI will reduce from £9,100 to just £5,000 per annum until 2028 and then will uprate with CPI thereafter. The figures show this will increase the treasury coffers by £23,770 million next year and roughly this amount every year after until 29/30.
Investment zones and freeports will continue to offer National Insurance (NI) relief, and the Veterans relief has been extended for another year. The Employment Allowance will increase from £5,000 to £10,500 annually, with the eligibility £100,000 threshold removed.
Due to the changes to the Employment Allowance, the Chancellor stated that there will be some 800,000 businesses better off, with others equal to now, but larger businesses will feel the impact as will their employees if this results in lack of pay increases or other benefits. For example, for an employee on the average UK wage of around £30,000, this will see an increase of just under 3% on their employer’s salary cost.
National Minimum Wage
The National Minimum Wage rates will see increases across all age groups. For those aged 21 and over, the rate will rise to £12.21 per hour. The rate for 18-20-year-olds will increase to £10 per hour, apprentices and those under 18 will see the largest hike to £7.55 per hour, moving towards a unified National Living Wage rate.
While this will be welcomed by lower earners, this could result in more individuals earning over the personal allowance threshold and therefore suffering income tax.
Income Tax
The Chancellor has decided to maintain the current income tax thresholds which have been frozen since 2021, and rather than extend this for a further two years, as predicted in the media, the thresholds will adjust according to the Consumer Price Index (CPI) from April 2028. This decision leaves the Scottish and Welsh rates pending further announcements.
Personal Allowance
Personal Allowance thresholds remain unchanged. However, there is a slight increase in the thresholds for the Married Couple’s Allowance for those born before April 6, 1935, and for the Blind Person’s Allowance.
Company Car Tax
The company car tax rates have been outlined up to 2027/28. Notably, the tax on electric cars will rise from 2% in 2024/25 to 5% by 2027/28. This increase suggests that salary sacrifice schemes will continue to be beneficial for both employers and employees, offering national insurance savings.
Apprenticeship Levy
The budget also mentions a future consultation on reforming the Apprenticeship Levy into a more flexible growth and skills levy, with an investment of £40 million.
From April 2026, it will become mandatory to report benefits in kind via payroll software. However, loans and accommodation will remain voluntary for payrolling and will be reviewed. The technical specifications for this change will be available in March next year, leaving employers with limited time to prepare. This shift aims to provide more detailed data through Real-Time Information (RTI), but it may pose challenges for employers.
Private Equity executives have benefitted from a preferential tax treatment on significant amounts of their remuneration, the equity interest received has been subject to capital gains tax as opposed to income tax as would be the case with any other employment income.
Private Equity Executives
This has been an area of tax that has been criticised for many years and we have anticipated a change in treatment and this Budget has brought in this change.
This income will no longer be subject to capital gains tax and will come within the income tax regime in full from April 2026 which will subject the income to tax at up to 45% plus Class 4 NIC. In the interim period from April 2025 to April 2026 the income will be subject to tax at 32% so for a period the benefit will not be removed in full. Certain “qualifying carried interest” could be subject to a lower rate based only on 72.5% of the total amount being subject to tax at income tax rates.
The individuals impacted are likely to be internationally mobile and able to relocate if this change is excessive for them which could impact the wider economy as a result of wealthy individuals exiting the UK, but we need to wait and see how it impacts tax payer behaviours.
Compliance and Oversight
The Chancellor announced increased budgets for compliance officers in the Department for Work and Pensions and HMRC. Additionally, a Covid Corruption Commissioner will be appointed, indicating ongoing scrutiny of furlough claims and the importance of maintaining accurate records.
Overview
Employer National Insurance Contributions and the increase in the National Living Wage will likely bring the most significant challenges to employers, with an impact on wage bills potentially discouraging any expansion in work force and/or reducing the opportunity for salary increases if additional costs have to be absorbed.
Budget analysis webinar
On October 31st, we hosted a Budget Analysis webinar, analysing the Chancellor's announcements and the potential consequences for both businesses and individuals.
If you would like further information about how the budget announcement impact your business, please get in touch. Call 0808144 5575 or email help@armstrongwatson.co.uk.
