With effect from 6 April 2025, the headline rate of employers’ national insurance contributions (NIC) will be increased by 1.2% to 15%.

The secondary threshold will be reduced from £9,100 to £5,000 per employee and the employment allowance will be increased from £5,000 to £10,500 for eligible employers.

Summary

The Chancellor has announced that the headline rate of employers’ NIC will be increased from 13.8% to 15%. The same increase will also apply to Class 1A and Class 1B NIC rates that employers pay on the provision of taxable benefits to employees.

In parallel, the Government will reduce the secondary threshold (the earnings above which employers begin paying employers’ NIC on an employee’s earnings), from £9,100 per employee per year to £5,000 per employee per year.

The Chancellor also announced changes to the employment allowance, which can be used to reduce an employer’s NIC bill. The allowance will be increased from £5,000 to £10,500 per year and, in a move to simplify the system, the existing £100,000 eligibility threshold will be removed, This threshold restricted eligibility for the employment allowance to employers with a total employers’ NIC liability of less than £100,000.

All of the above changes take effect from 6 April 2025.

The Government has estimated that these changes will raise approximately £24 billion per annum over the next five tax years.

Our comment

While the increase in employment allowance softens the impact for small employers, the employers’ NIC changes are likely to represent a significant additional cost for larger employers.

For example, an employer with an annual wage bill of £5,000,000 across 100 employees would currently have an employers’ NIC liability of approximately £564,000. From the start of the 2025/26 tax year when the changes are implemented, employers’ NIC costs in this example will rise to approximately £664,500, an increase of 17.82%.

In light of the increased costs from April 2025, employers who have not yet implemented pension salary exchange should consider doing so as the savings generated will become even more attractive from a tax perspective. Similarly, employers may wish to consider bringing forward the payment of bonuses to employees relating to the FY24 performance year.

Employers will also need to consider the wide-reaching impact of this change, including the cost of employee benefits and engaging with off-payroll workers.

The overseas workday regime (OWR) has been extended to align with the new foreign income and gains (FIG) regime. It will be available to inbound employees for four years as opposed to three years under the current non-UK domicile regime. The Government has also introduced a financial limit on the amount of OWR which can be claimed.

The changes also include a number of updates to the transitional rules which will apply.
Employers will need to consider the impact of these changes on any inbound expatriate employees and the potential cost impact on their mobility programs. 

Summary

• Further detail has been published with regard to the operation of the FIG regime that will come into effect from 6 April 2025. Some of the detail remains the same as previously announced, but there are some key changes and further details as follows:
• Under OWR existing rules, inbound non-UK domiciled employees can benefit from an income tax exemption on income from non-UK duties for the first three years of UK residence, subject to that income not being remitted to the UK. The new rules will extend the relief to the first four years of UK residence, and remove the requirement to keep the income offshore, meaning that the overseas element of the employment income can be brought to the UK without a tax charge. There will also be a financial limit on the relief at the lower of £300,000 or 30% of the employment income. Individuals who are part way through the claim, will not be subject to these limits
• There is currently an exemption for travel costs between the UK and the home country incurred by non-UK domiciled employees where these are paid for by the employer during the first five years in the UK (home leave trips). This will be reduced to four years to align with the new FIG regime
• With regards to transitional arrangements, the key points for employers are:
  • The temporary repatriation facility (TRF) will be available for a total of three tax years, starting from the 2025/26 UK tax year rather than the original two tax years previously planned. Income previously exempted under OWR will be eligible for TRF purposes.
• There will be some easing of the mixed fund rules in order to make it easier to take advantage of the TRF
  • Existing remittance basis users who dispose of non-UK capital assets on or after 6 April 2025, and held the asset at 5 April 2017, can rebase the asset to the value at 5 April 2017. This will be relevant for employees who hold non-UK shares of the company
• From 6 April 2025, employers or their agents will no longer have to wait for HMRC to approve applications to reduce the operation of PAYE to the proportion relating to the employee’s expected work in the UK. Just having the auto-acknowledgement of the application will suffice

Our comment

Whilst the further detail on the new FIG regime provides additional clarity on how the regime will apply and is much welcomed, the new rules may not be as easy to implement in practice. Pre-6 April 2025, income continues to be subject to the existing remittance basis rules, whilst post-6 April 2025 income will be subject to the new FIG regime. 

Removing the remittance basis creates a lot of simplicity. However, there are some complexities in the new rules, particularly in relation to ‘trailing’ income e.g. bonuses or equity awards which relate to a different period to when they are actually paid.  

Employees will need to consider the impact of these changes on their inbound employees, and review their policies and processes. 

Increased rates of capital gains tax (CGT) will apply to capital gains from shares. This will reduce, but not remove, the main tax benefits from using shares and tax-advantaged share options to reward employees with effect from 30 October 2024.

Similarly, increases to CGT rates will reduce the benefit of the less restrictive Business Asset Disposal Relief (BADR) qualifying conditions for shares acquired under Enterprise Management Incentives (EMI) options granted on or after 6 April 2023.

Summary

The main tax benefit from properly implemented ‘growth shares’, as well as from shares acquired under tax-advantaged EMI, company share option plans (CSOP) and save as you earn (SAYE) share options, is that the increase in share value from the date of issue or grant (respectively) should be subject to CGT rather than income tax (often at a rate of 40% or 45%). That benefit will remain but be diminished by the increase in the applicable CGT rates from 10% and 20% to 18% and 24% from 30 October 2024.

Similarly, the increase to the CGT rates where BADR applies (from 10% to 14% from 6 April 2025 and to 18% from 6 April 2026), will reduce the benefit of the less restrictive BADR qualifying requirements for EMI option shares. In effect, as the combined holding period for the option and the option shares must be at least two years:

• shares acquired under any EMI option granted on or after 6 April 2023, if they qualify for BADR, will be subject to a CGT rate of at least 14%, rather than 10% and;
• shares acquired under any EMI option granted on or after 6 April 2024, if they qualify for BADR, will be subject to a CGT rate of at least 18%, rather than 10% or 14%

Employer Class 1 national insurance contributions (NIC) will increase from 13.8% to 15% from 6 April 2025. This will have a marginal impact on the combined effective rate of income tax and Class 1 NICs where shares are acquired on exercise of a share option and the employee bears all of the employer NICs. For a 40% taxpayer, the combined rate will rise from 50.28% to 51%. For a 45% taxpayer, the combined rate will rise from 54.59% to 55.25%.

Our comment

Shares and tax-advantaged share options will remain attractive despite the reductions to their associated tax benefits, as a result of the increased CGT rates announced on 30 October 2024.

From 6 April 2025, a single capital gains tax (CGT) rate of 32% will apply to amounts arising from carried interest other than income-based carried interest (ICBI). From April 2026, carried interest amounts will be subject to income tax rather than CGT under new rules, but the effective income tax rate will be less than 45%. The Government is consulting on details of the proposed new income tax rules.

Summary

From 6 April 2025, a single capital gains tax (CGT) rate of 32% will apply to amounts arising from carried interest other than income-based carried interest (ICBI). From April 2026, carried interest amounts will be subject to income tax rather than CGT under new rules, but the effective income tax rate will be less than 45%. The Government is consulting on details of the proposed new income tax rules.

Our comment

Potentially affected taxpayers will be keenly interested in the outcome of the consultation on further possible reforms to the definition of carried interest under the income tax rules applicable from April 2026.

The expected combined effective rate of income tax and NICs on carried interest amounts under the new rules will fall a little below the level at which lobbyists for fund managers reportedly forecasted there would be significant fund manager departures from the UK.

Subjecting carried interest to Income Tax rather than CGT may bring some carried interest within the scope of UK taxation which otherwise would not be, including some amounts arising to non-UK individuals who undertake investment management activities in the UK. However, this is likely to depend on the interaction between the new UK rules and any applicable double taxation convention.

From 1 April 2025, National Minimum Wage (NMW) and National Living Wage (NLW) rates will be increasing. The National Living Wage will rise by 6.7% to £12.21 per hour and the National Minimum Wage will rise by 16.3% to £10.00 per hour. 

Summary

The Chancellor has announced that the Government has accepted the recommendations of the Low Pay Commission to raise NMW rates with effect from 1 April 2025.

For pay reference periods beginning on or after this date, the following rates should be applied by employers:

• National Living Wage (for those aged 21 years and over) - £12.21 per hour, an increase of 6.7% from the current rate of £11.44 per hour
• National Minimum Wage (for those aged 18 – 20 years) - £10.00 per hour, an increase of 16.3% from the current rate of £8.60 per hour
• Apprentice rate (for those aged under 19 years or aged 19 years or over and in the first year of their apprenticeship) and National Minimum Wage (for those aged 16 – 17 years) - £7.55 per hour, an increase of 18.0% from the current rate of £6.40 per hour.
• Accommodation offset rate (for those provided with accommodation by their employer) - £10.66 per day, an increase of 6.7% from the current rate of £9.99 per day.

The larger increase in the NMW rate for those aged 18 – 20 years signifies the Government’s desire to move towards a single unified adult NMW rate in due course.

Our comment

This represents another substantial increase in costs for employers who have employees on NMW, following similarly large rises since April 2022.

By way of example, following the change in rates from 1 April 2025, an employee working 40 hours per week on NMW will be entitled to a salary of £25,397. 

The latest rise in NMW rates will bring pay closer to that of higher paid employees, which may create inflationary pay pressure. Employers will also need to ensure they have robust processes in place to monitor for NMW compliance and consider the impact of common pitfalls on a wider group of employees’ pay, such as salary sacrifice deductions and the accurate recording of working time given increased scrutiny from HMRC in this area.

Significant reforms will apply to EOTs that acquire a controlling interest in the relevant company from 30 October 2024, including: (1) a requirement that the former owners, connected individuals or connected companies must not make up a majority of the EOT trustees, or of the directors of a corporate trustee; (2) the extension of the period in which EOT relief can be clawed back from the former owners to the end of the fourth tax year after the tax year of disposal and; (3) a requirement that the EOT must be UK resident.

In addition, various other reforms are to be made to tax laws relating to EOTs and EBTs.

Summary

Following a consultation in 2023, the Government has now announced various reforms to tax laws relating to EOTs and EBTs, including, for companies disposed of to an EOT from 30 October 2024:

1. a requirement that the former owners, connected individuals or connected companies must not make up a majority of the EOT trustees, or of the directors of a corporate trustee. In addition, such persons must not be able to exercise control through powers in the EOT trust deed;
2. the extension of the period in which EOT relief can be clawed back from the former owners if there is a disqualifying event to the end of the fourth tax year after the tax year of disposal (increased from the end of the first tax year after the tax of disposal). From the end of the vendor clawback period a disqualifying event results in the relief being clawed back from the trustees, by way of a deemed disposal;
3. a requirement that the EOT must be UK resident and;
4. a requirement that EOT trustees take reasonable steps to ensure that they pay no more than market value for the EOT’s controlling interest in the relevant company.

For EBTs there will be a new requirement from 30 October 2024. In order to qualify for inheritance tax relief, shares transferred to an EBT should have been held for 2 years by the transferor, amendments to the legislation to make it clear that persons who are ‘connected’ to a ‘participator’ should not be able to receive capital benefits from the EBT for the EBT’s lifetime and must not comprise more than 25% of the beneficiaries who can receive income payments from the EBT. 

Our comment

While the generous CGT relief will ensure that EOTs remain attractive as a possible exit route for company owners, some of these reforms will be unwelcome to some company owners currently planning to sell a controlling interest to a new EOT. More thought and care will now be required as to the make up of the trustees, and the significant extension to the vendor clawback period will undoubtedly increase vendors’ focus on ensuring that any new EOT will be viable and well run.

Mandatory payrolling of benefits in kind will be implemented from April 2026, except for employment related loans and accommodation.  

Other changes announced include updates to the van benefit and fuel benefit charges, treatment of double cab pick-up vehicles and  the responsibility for accounting for PAYE on payments made to workers supplied by umbrella companies. 

Summary

Payrolling benefits

First announced by the previous Government in January 2024, the Chancellor confirmed that the payrolling of benefits in kind will become mandatory from 6 April 2026. However, in a departure from the previous guidance, employment related loans and accommodation have been carved out from mandatory payrolling. It will still be possible for employers to prepare a Form P11D to report these benefits. 

Car and van benefits in kind

Double cab pick-up vehicles with a payload of one tonne or more will be treated as cars for benefit in kind reporting purposes from 6 April 2025. This is a departure from the current treatment of these vehicles as vans, which followed a recent Court of Appeal judgement.  Transitional benefit in kind arrangements will apply for employers that have purchased, leased or ordered a double cab pick-up vehicle before 6 April 2025, whereby the previous benefit in kind reporting treatment can be applied until the earlier of disposal, lease expiry or 5 April 2029.

With effect from 6 April 2026, the Government will introduce legislation to close a loophole whereby employees could circumvent the company car benefit in kind charge. It is targeting arrangements whereby an employer or third party sells a car to an employee, often via a loan with no repayment terms and negligible interest, and then buys the vehicle back after a short period.

The Government also announced updates to company car benefit rates: 

• The appropriate percentage for zero emission and electric vehicles (EVs) will rise by 2% in each year from 2028/29, increasing to 9% by 2029/30
• The appropriate percentage for cars with emissions of 1–50 grams of CO2 per kilometre will rise to 18% in the 2028/29 tax year and 19% in the 2029/30 tax year.  
• The appropriate percentage for all other cars will increase by 1% in each year from 2028/29, with the maximum appropriate percentage of 38% for the 2028/29 tax year and 39% for the 2029/30 tax year
   
  From the start of the 2025/26 tax year, the van benefit charge, van fuel benefit charge and car fuel benefit charge multipliers will be increased by the September 2024 Consumer Prices Index rate to £4,020, £769 and £28,200 respectively.

Payments made to workers supplied by umbrella companies

The Government has announced a crackdown on tax non-compliance in the umbrella company market, which will make agencies responsible for accounting for PAYE on payments made to workers that are supplied by umbrella companies. Where there is no agency in the supply chain, the responsibility to account for PAYE will rest with the end client business, in much the same way as the IR35 rules currently operate. These changes will take effect from 6 April 2026 and further guidance will be published in due course.

Our comment

Mandatory payrolling of benefits in kind brings advantages for both employers and employees. For employers, no longer needing to file P11D forms will reduce the administrative burden of compliance. Employees will be able to see the tax impact of their benefits in kind in real-time.  

Further consideration needs to be given to the mechanics for more complicated benefits in kind (accommodation and employment related loans) and we await with interest further guidance from HMRC.

The changes to the responsibility for accounting for PAYE on payments made to workers supplied by umbrella companies are important, as they underline the necessity for employers to undertake sufficient supply chain due diligence when engaging off-payroll workers.