30 October 2024 saw the Chancellor of the Exchequer, Rachel Reeves, unveil the new Labour government’s greatly anticipated first budget.
The government has announced that employees will face no increase to national insurance, income tax or VAT.
However, among a wide array of taxation and relief changes, the Chancellor announced a raise in employer National Insurance Contribution (NIC) rates, increasing from 13.8% to 15%. The increase was further compounded by a reduction to the secondary threshold for employer NIC which will be reduced from £9,100 to £5,000, meaning employers will pay NIC on potential extra £4,100 of income for each employee.
To put this into perspective, for an employee earning £3,000 per month, or £36,000 annually, the employer’s NIC will increase from £309.35 to £387.50 per month—an increase of £78.15 per employee per month.
An increase to the Employment Allowance was also announced, rising from £5,000 to £10,500. The government has stated that this change will mean over 856,000 employers will pay no national insurance next year, and over one million employers will pay the same or less than last year. This increase will help smaller employers combat the rise in NIC rates and the reduction of the secondary threshold.
The Chancellor has also completed on the Labour government’s promise to “raise the floor” on wages, raising minimum wage above inflation from £11.44 to £12.21 – a 6.7% increase.
Additionally, national minimum wage for 18-20 year olds has been increased by 16.5% to £10.
While on the surface this seems like a boost for employees, many may find themselves paying increased amounts of tax. With tax brackets frozen, many employees on minimum wage may find themselves moving above the £12,570 minimum threshold. Some lower rate taxpayers may also find themselves moving to the higher rate.
Speaking on the Budget, Kevin Parsons, Managing Director of Cooper Associates Accountancy comments:
“The 1.2% increase in the employers NIC rate to 15% from 13.8% is another blow to small businesses who will see a rise to their monthly wages costs. Although this extra income raised by the treasury is being directed towards the NHS, this will be damaging to many of our clients who are still suffering from the recent high interest rates and energy costs. We will continue to ensure that our clients are claiming the employment allowance per year which will help some businesses to ease this extra NIC burden.
Further changes that will have an adverse effect to small businesses, is the increase in the minimum wage which could bring more and more employees into paying tax or even paying tax at higher rates if the income tax thresholds are kept the same.”
If you wish to discuss the impact that the Budget will have on your accounts, please get in touch with one out of expert accountants today.
