National Insurance changes from April 2025

Last October Chancellor Rachel Reeves announced some far-reaching National Insurance changes which will affect employers from April 2025. She also confirmed the rates applying to employees and to the self-employed. These changes represent one of the most significant shifts in National Insurance policy in recent years, and it’s essential that business owners, contractors and employees understand what’s coming.

Employer National Insurance – the headline change

From 6 April 2025, the employer National Insurance contribution rate will increase from 15% to 15.8%. Whilst this might seem like a modest jump, the real impact lies in the Secondary Threshold (the earnings level at which employers start paying NI) being frozen at £9,100 per annum.

This means that employers will start paying contributions on a larger portion of payroll immediately. For a business with ten employees earning an average of £30,000 each, this will translate to a noticeable increase in employment costs. The Office for Budget Responsibility (OBR) estimates this could cost employers around £25 billion across the economy annually.

However, there is some relief available. The Government has extended and enhanced the Employment Allowance scheme. From April 2025, the allowance will increase to £5,000 per year (up from £3,500), and the eligibility criteria have been broadened. More businesses will now qualify, particularly smaller employers, charities and community interest companies. This should help offset some of the additional cost, though it won’t eliminate it entirely.

What changes for employees?

The good news for employees is more straightforward: nothing changes. Employee National Insurance contributions will remain at 8% on earnings between £12,570 and £50,270 per year (the current Primary Threshold and Upper Earnings Limit). The Government has been keen to emphasise that employees won’t face additional deductions from their wages.

The Personal Allowance also remains at £12,570, which means the overall tax-free allowance hasn’t changed. For payroll administrators, this means no updates are needed to employee tax codes in April 2025 – though you’ll obviously need to update for the employer contributions if you’re running payroll in-house.

Self-employed National Insurance – a different picture

Self-employed individuals face more complexity. From April 2025, Class 2 National Insurance contributions will increase to £165 per year (from £163.80), a relatively minor change. However, the more significant impact comes through Class 4 contributions.

The Class 4 rate applies to profits between £11,908 and £50,270 annually and will increase from 8% to 8.45%. For a sole trader earning £40,000 in net profit, this represents an additional £220 per year in National Insurance alone. Those earning above £50,270 will pay the additional contribution on the excess above that threshold at a rate of 3.45% (up from 2%).

If you’re self-employed, it’s worth reviewing your business structure. Some contractors may find it more beneficial to operate as a limited company, though this needs careful consideration alongside Corporation Tax implications and dividend allowances.

Planning ahead

Business owners should start preparing now. If you haven’t already done so, review your payroll budget for the next financial year. Calculate the estimated impact using your current workforce and salary structure. Don’t forget to factor in any employment allowance relief you might be entitled to claim – it’s often overlooked but can be substantial.

If you employ staff, consider whether this might be the right time to review your salary and benefits strategy. Some employers are exploring alternative compensation packages, including pension contributions and benefits in kind, to manage overall employment costs more effectively.

For contractors and the self-employed, this might be an opportune moment to review your accounting and tax planning arrangements with a qualified accountant. There may be opportunities to structure your business more tax-efficiently, though you’ll need advice tailored to your specific circumstances.

Final thoughts

The April 2025 National Insurance changes represent a real cost to UK employers and higher earners. Whilst the Government’s intention is clear – to invest in public services – the practical impact on cash flow and competitiveness shouldn’t be underestimated. The earlier you plan, the better positioned you’ll be to manage these changes.

For tailored advice, contact Severn Accounting — we’re here to help.