Could an employer NI increase impact your financial plan?

With the Autumn Budget almost here, the rumour mill is picking up pace. The latest buzz is around the fact that Labour’s manifesto pledge to not increase NICs, does not include changes to employer NICs.

Given how many taxes Labour have explicitly ruled out changes to, any reluctance to rule out others supports speculation that an increase could be on the cards. That’s exactly what’s happened with employer national insurance (NI), with both the Chancellor Rachel Reeves and Prime Minister Keir Starmer refusing to exclude the potential for a rise in recent interviews.¹

If you’re not an employer, you might be thinking that this potential change isn’t going to have much impact on you and your financial plan. While you’d be correct that an increase in employers’ NI isn’t going to directly change your monthly pay, there could be a number of indirect impacts which require a review of your strategy.

Once an employee earns over £175 per week, their employer must pay NICs on their behalf. The current rate at which these are paid is 13.8%, so for earnings of £1,175 per week, an employer must pay an additional £138.

These are separate to employee NICs, which are deducted from an employee’s gross pay once their earnings are over £242 per week, while employer NICs are paid directly by the employer to HMRC.

One of the promises made by Labour in their pre-election manifesto was to not increase taxes on “working people”, stating explicitly that “We will not increase taxes on working people, which is why we will not increase national insurance, the basic, higher, or additional rates of income tax, or VAT.”²

The general consensus was that this meant no changes to national insurance at all, however in recent days, comments from the Prime Minister, Chancellor and Business Secretary Jonathan Reynolds have made it clear that this promise refers to employees only.

With such a clear distinction being made, it appears as if an increase to employer NICs could be a strong consideration for the government in the Autumn Budget.

In the short term, any increase to employer NI will put additional pressure on business profits. For directors and business owners, it may mean they need to review the way they take income and profits from the business. Unfortunately, employees are likely to be indirectly affected by this change as well.

Directors and business owners

Those who own their own businesses often have greater flexibility to manage their tax and NI liabilities based on how they withdraw income and profits from the company. Any changes to NI rules would likely mean the need for a review of how their personal cashflow is structured.

Ann-Marie Atkins, Managing Partner, Financial Planning, at Evelyn Partners says,

“If employer NI goes up, more shareholders of businesses may want to consider taking dividends out of companies as opposed to pay as you earn (PAYE). However, this can have broader implications for other parts of a financial plan, like pension contributions and debt serviceability.”

Employees

The impact to employees might not be as obvious, but they could arguably be more profound. The additional costs from an increase to employer NI is likely to flow into companies’ annual budgets, which impact the pool of funds available for pay raises and bonuses.

In the worst-case scenario, it might even push struggling businesses closer towards layoffs.

Atkins says, “The key for employees is to make sure the fundamentals of their financial plan are strong. Make sure you have a healthy emergency fund and understand how any turbulence in your career could affect your long-term goals like retirement.”

But it may not be all bad news. Changes could incentivise employers to open up options that actually give employees’ more choice. “We could see employers offering greater levels of salary sacrifice for eligible employees, because they don’t pay employer NI on the sacrificed amount. In fact, some employers could even offer to share some of the additional savings, like paying half of their NI saving as an additional pension top up. These are all things people should be looking for after the announcement,” adds Atkins.

So, for employees, assessing the potential impact of this change isn’t easy. It’s not as simple as looking at a new payslip and seeing a new figure. It’s this type of change where cashflow modelling can provide a huge amount of value.

In addition to forward forecasts that estimate net worth at retirement and calculate how long your money is expected to last, your financial planner can also adjust the assumptions and scenarios within your plan to see the impact of different outcomes.

For example, you might want to consider a flatlining of your income for a period of five years, to see if this changes your ability to meet your financial goals. Or perhaps you want to see the long-term impact of a three-month job search while you use your emergency fund for living expenses.

This type of stress-testing can help you understand how your financial future could be affected by negative events. From there, you can work with your financial planner to put in place strategies to protect against them.

Time is running out to implement pre-emptive strategies before the Autumn Budget. If you have any questions about your own financial plan, or you want to use cashflow modelling to gain better insight into your financial future, book a free initial consultation online or call 020 7189 2400.

You can also read more on the tax implications for employers of a potential employers NIC increase here.

¹ BBC, Keir Starmer does not rule out NI rise for employers, 15 October 2024

² Labour Party, 2024 Election Manifesto, 13 June 2024