Are you prepared for payroll changes in light of the Budget’s National Insurance updates?

With the October 2024 Budget introducing major changes to employers’ National Insurance contributions (NICs), payroll departments across businesses will need to adapt to ensure compliance and manage rising costs.

Key changes to employers’ National Insurance Contributions

The upcoming changes to NICs, effective from 6 April 2025, include the following adjustments.

Increase in employer NIC rates

Employers will see a rise in NIC rates from 13.8 per cent to 15 per cent, meaning higher contributions for each employee earning above the threshold.

This increase aims to generate additional revenue to support public services but may place additional cost burdens on businesses.

Lower secondary threshold

The secondary threshold, which is the level of earnings at which employer NICs begin, will decrease from £9,100 to £5,000 per year.

As a result, NICs will apply sooner within the pay range, potentially affecting overall labour costs and payroll forecasting.

Enhanced Employment Allowance

The Employment Allowance, which offers NIC relief to eligible employers, will be raised from £5,000 to £10,500.

This relief is designed to support smaller businesses, allowing them to offset part of their NIC costs, which could ease the impact of the higher NIC rate for many organisations.

How these changes will impact payroll processes

The adjustments to NICs will have practical implications for payroll operations. Here are the main areas payroll teams should prepare for.

Updating payroll systems and calculations

Payroll software and systems will need to be updated to reflect the increased NIC rate of 15 per cent.

Additionally, calculations for the reduced secondary threshold will need to be integrated into payroll processes to ensure accurate deductions from April 2025 onward.

For businesses managing payroll manually, keeping calculations precise will require close attention to detail.

Applying the revised Employment Allowance

For eligible businesses, the new Employment Allowance of £10,500 will need to be applied correctly.

Payroll teams should confirm that this relief is accounted for accurately, particularly as it represents a larger allowance than before and could make a significant difference for many firms.

Cost impact analysis and financial forecasting

The rise in NICs and the lower threshold may affect budgets, especially for businesses with large workforces.

Payroll departments will likely need to collaborate with finance teams to assess how these changes influence labour costs and future financial planning, as well as consider any potential impacts on staffing and wage growth.

Improved communication

Changes to employer NICs might prompt employees to ask questions about their pay or contributions.

Payroll departments should be prepared to address these queries and clearly communicate the reasons behind any adjustments, helping to reassure employees and maintain trust in the payroll process.

Ensuring compliance with system and software updates

Payroll software providers are likely to release updates or patches in advance of April 2025.

Payroll teams must keep systems current and apply any necessary updates to avoid calculation errors or issues with compliance.

For businesses using in-house or bespoke payroll solutions, consulting with IT and software providers may also be required.

Our team of payroll specialists can help businesses optimise their payroll processes, stay compliant, and manage costs effectively.

If you require assistance preparing your payroll department in light of these changes, contact us today.