Understanding changes to National Insurance (NI) and income tax is essential for both individuals and businesses. Recent updates announced in the Spring Statement will have wide-ranging effects, especially in the context of frozen tax thresholds and increasing employer costs. Here’s a clear breakdown of what’s changing, and how these developments may impact your financial planning.
What Is National Insurance and Why Do We Pay It?
National Insurance contributions (NICs) fund vital public services including the NHS, state pensions, and certain benefits. These contributions are made by employees, employers, and the self-employed. If you’re over the state pension age, you do not pay NI, even if you continue working.
Eligibility for some benefits, including your state pension entitlement, depends on the number of NI contributions made throughout your working life.
Employer National Insurance – What’s Changing?
From 6 April 2025, the employer rate of NI increases from 13.8% to 15% on employee salaries above £5,000 per year (down from £9,100). This represents a substantial rise in payroll costs for businesses.
However, there is some relief: the employment allowance will increase from £5,000 to £10,500, allowing smaller employers to claim back more of their NI bill.
What This Means for Employers:
Budget impact: Employers should prepare for increased employment costs, particularly those with larger or growing workforces.
Strategic planning: Consider reviewing workforce strategy, salary structures, and potential automation or outsourcing to mitigate long-term costs.
Claim the allowance: Ensure you’re taking full advantage of the raised employment allowance if eligible.
What’s Happening with Employee and Self-Employed NI?
While employer NI rates are going up, employees and the self-employed have seen reductions in their main NI contribution rates:
Employees: The main rate fell from 12% to 10%, and then again to 8% in 2024.
Class 4 NI (on earnings £12,570–£50,270) reduced from 9% to 6%.
Class 2 NI has been abolished entirely.
Self-employed:
For a worker earning £35,000, this means a saving of around £900 a year. For a self-employed person earning £28,200, the reduction is worth roughly £350 annually.
Important Note:
The rate on earnings above £50,270 remains at 2%, so higher earners will see less overall benefit.
Income Tax – Frozen Thresholds and Growing Implications
While income tax rates remain unchanged, thresholds have been frozen until 2028, meaning more people are paying more tax as wages rise with inflation:
Basic rate (20%): £12,571–£50,270
Higher rate (40%): £50,271–£125,140
Additional rate (45%): £125,140+
In Scotland, income tax rates differ, with the top rate increasing to 48% in April 2024.
Why Freezing Thresholds Matters:
This policy, known as fiscal drag, means:
More people pay income tax for the first time.
More taxpayers move into higher bands without actual increases in real income.
A significant portion of any NI savings is offset by higher income tax bills.
According to the Institute for Fiscal Studies (IFS), while average earners may see a modest short-term gain (e.g. £340/year), by 2027 only people earning between £32,000 and £55,000 are likely to still benefit.
The Bigger Picture: UK Tax in Context
UK tax revenue was 35.3% of GDP in 2022, placing it mid-range within the G7.
However, taxes in the UK are historically high and expected to hit 37.7% of GDP by 2028, the highest level on record according to the Office for Budget Responsibility (OBR).
Implications for Our Clients
Whether you’re an individual taxpayer, business owner, or self-employed, these changes have material consequences:
For Employers:
Plan for the 15% NI rate – consider employment strategies, salary banding, and automation.
Claim the increased employment allowance where applicable.
Forecast staff costs more conservatively in long-term financial planning.
For Employees:
You may save on NI but pay more income tax over time as thresholds stay fixed.
Monitor your income growth relative to tax bands to avoid bracket creep.
For the Self-Employed:
Benefit from simplified NI payments with Class 2 abolished.
Review your tax profile holistically, especially if you approach the £50,270 upper band.
For All Clients:
Keep records up-to-date in preparation for Making Tax Digital and future compliance requirements.
Consider pension contributions and salary sacrifice schemes to mitigate exposure to rising tax liabilities.
Disclaimer: This content is for general information only and does not constitute legal or financial advice. Always consult a professional for guidance tailored to your specific circumstances.