In November 2024, the Chancellor of the Exchequer, Rachel Reeves announced changes to Secondary Class 1 National Insurance contributions (SC1-NICs) for employers within the UK. We outline those changes, how they have affected the UK economy over the last few months, and how we expect the economy to react going into April 2025 and beyond.
Secondary Class 1 NICs are paid by employers for each employee that hits a minimum earnings threshold at each payroll. This is known as the secondary threshold.
NIC rate changes
In the tax year leading up to April 2025, the following conditions applied for SC1-NICs:
- Employment Allowance is up-to 5000 for eligible employers*
- Secondary threshold is 175pw / 758pm / 9,100pa
- Rate of secondary Class 1 NICs is 13.8%
* Eligibility for Employment Allowance: employer's Class 1 NI liabilities were less than 100,000 in the previous tax year. Variations apply where part of a group or multi-payroll.
From April 2025, the following conditions will apply:
- Employment Allowance is up-to 10,500*
- Secondary threshold is 96pw / 417pm / 5,000pa
- Rate of secondary Class 1 NICs is 15%
* The previous tax year limit has been removed.
It is also important to note that the rate applies to wages above the secondary threshold not the entire wage.
The Office for Budget Responsibility (OBR) released their forecast in relation to these increases in October/November 2024. Their report expected the increased costs to businesses to lead to lower wages and profits. However, the change to the CPI (inflation) was estimated at only 0.2% due to some costs being passed onto consumer prices.
Government impact assessment on workers
No direct impact on workers as SC1-NICs are payable by the employer.
Indirect impact possible where the employer may face increased costs. This could include reduced hours, lower wages or redundancies. The change in threshold means workers could hit the threshold if working 8 hours at minimum wage, down from just over 15 hours per week. This is in part due to the increase in the NLW (national living wage).
Government impact assessment on businesses
It is estimated that around 940,000 employers in the UK will see an increase in SC1-NICs, although the actual increase will vary depending on their employee payroll.
How could this change affect the workforce?
This means that a lot more part-time employees will fall within the new threshold. This part of the change is likely to have a significant impact on employers where a proportion of their staff do under c.16 hours per week. Think retail, hospitality and serviced operations. Everything from clothes shops and supermarkets to take-aways and clubs, cleaners to school crossing (lollypop) workers.
What we've seen so far
In a report from KPMG and REC (the UK recruitment body), the UK labour market is showing signs of stagnation.
The reports key findings are:
- Reports of an increase in redundancies
- Lower demand for new staff placements (less available positions)
- Pay growth reducing
- Higher number of staff looking for work
Firms are reducing staff count and not replacing those who leave. Additionally, pay is not rising as fast as last year. With more staff looking for work, but less positions, staff are staying put longer as the grass is not greener for many. The power is shifting back towards employers from employees and candidates currently.
Many firms reported a temporary hold on recruitment. It should be noted that this report is focused on professional firms and not necessarily the whole of the job market. More about that report is available here: KPMG and REC, UK Report on Jobs.
What we expect to happen into April and beyond
The report noted above does not expect major changes in the next few months. However, with core inflation and the CPI remaining under 4%, we can expect additional interest rate drops by the Bank of England through 2025.
As these factors combine, market confidence will increase, and this usually leads to better availability of credit for businesses to invest in their futures. It's likely there will be increased investment in IT infrastructure including so-called AI - although there is also a possibility that bubble will burst. Lower interest rates also typically lead to consumers spending, rather than saving. Although, given the dramatic price increases we have seen in recent years, prices may take a while until they feel correct, even if they don't actually drop.
It will be interesting to see how employees adapt to the new NICs and how much these changes and the new National Living Wage affect employment moving forward in 2025.
How the retail market is responding
Following the NIC announcement by the Chancellor, retailers had warned that the increase in minimum wage along with the rise in NICs (both threshold and component value) would trigger inflationary price increases, job losses and potentially shuttering of parts of stores or entire stores where the margins are tight.
In an article published in The Times this week, Stuart Machin, the CEO of M&S stated his opinion that retailers were being "raided like a piggy bank" due to the tax changes. He remarked that "the chancellor wants growth, but the sector is being hit with tax rises, wage increases and recycling levies."
This week Aldi, Lidl, and Sainsbury's have all announced wage increases above the National Living Wage (NLW). Although Sainsbury's restructuring is expected to cost 3000 jobs as they shutter some counters.