With the end of the 2024/25 tax year is within our sights, we should now look forward to the big changes for the coming tax year 2025/26. As of April 6, 2025, several key changes affecting employment costs will come into effect. It’s essential for employers to understand these updates to manage their financial planning and ensure compliance.
National Living Wage (NLW) and National Minimum Wage (NMW) Increases
The national living wage and national minimum wages have seen adjustments for the upcoming tax year. The government has announced significant increases to both the NLW and NMW rates, effective from April 1, 2025:
- National Living Wage (for workers aged 21 and over): Rising from £11.44 to £12.21 per hour, marking a 6.7% increase.
- Ages 18 to 20: An increase from £8.60 to £10.00 per hour, a 16.3% rise.
- Ages 16 to 17 and Apprentices: Both rates will go up from £6.40 to £7.55 per hour, representing an 18% increase.
These adjustments aim to improve living standards for workers across various age groups.
The 6.7% increase in the National Minimum Wage will result in an additional annual cost of £1,601.60 per full-time employee (based on a 40-hour workweek).
National Insurance Contributions (NICs) Adjustments
Employers should be aware of the following changes to NICs, effective from April 6, 2025:
- Secondary Class 1 NICs Rate: The rate will increase from 13.8% to 15%.
- Secondary Threshold : A new threshold of £5,000 per year will be introduced (from £9,100)
These changes will impact the amount employers contribute towards NICs for their employees. As the LEL threshold is reduced, this means employers will see an increase in National Insurance Contributions by £615 (£9,100 – £5,000 = £4,100 x 15%)
Employment Allowance Increase
To support businesses, the Employment Allowance will see the following changes:
- Allowance Increase: The maximum allowance will rise from £5,000 to £10,500.
- Eligibility Expansion: The previous £100,000 eligibility threshold will be removed, allowing more employers to benefit.
This enhancement aims to alleviate some of the increased employment costs for businesses.
Impact on Businesses
These changes are designed to improve employee compensation and support businesses. However, employers should assess the financial implications, including increased wage bills and NICs contributions, and adjust their budgets accordingly. Utilizing the enhanced Employment Allowance can help offset some of these costs.
For employers paying salaries close to the threshold will see higher costs. With the threshold reduced from £9,100 to £5,000, this will see an increase in Employer’s NIC contributions. With the increased Employment Allowance, businesses can still see savings in costs. Here are some example computations:
Number of Employees 5 6 7 8
Annual Earnings per Employee 25,000 25,000 25,000 25,000
NIC 2024/25 £2,194.20 £2,194.20 £2,194.20 £2,194.20
NIC 2025/26 £3,000 £3,000 £3,000 £3,000
Additional Employer NIC £805.80 £805.80 £805.80 £805.80
x number of employees 5 6 7 8
Total Increase in Employer NIC £4,029 £4,835 £5,641 £6,446
Additional Employment Allowance £5,500 £5,500 £5,500 £5,500
Additional Costs / (Savings) -£1,471 -£665 £141 £946
With 5-6 employees, the company will still see savings. At 7 employees, the increased NI costs offsets the increased Employment Allowance but the overall NI Cost remains roughly the same.
Planning Ahead
This is the time to review payroll costs and factor in increased wages and NICs rates. Understanding these changes and their impact can be complicated. We can help you navigate these updates and optimise your budget adjustments. Feel free to reach out! If you require assistance or tax advice, please contact a member of our team on 0333 772 7753 or email [email protected]
