Policy paper

Changes to the Class 1 National Insurance Contributions Secondary Threshold, the Secondary Class 1 National Insurance contributions rate, and the Employment Allowance from 6 April 2025

Published 13 November 2024

Who is likely to be affected

Employers with a Secondary Class 1 National Insurance contributions (NICs) liability, or with employees with earnings of at least £5,000 a year.

General description of the measure

This measure decreases the NICs Secondary Threshold, the earnings after which an employer becomes liable to pay secondary Class 1 NICs on a given employment. The Secondary Threshold is currently set at £9,100 a year, and will be reduced to £5,000 a year.

The Secondary Threshold of £5,000 a year will be in effect from 6 April 2025 until 5 April 2028. Thereafter the Secondary Threshold will be increased in line with Consumer Prices Index (CPI). This does not impact other employer NICs thresholds such as the Apprentice Upper Secondary Threshold or the Upper Secondary Threshold for employees under 21.

This measure also:

• increases the secondary Class 1 NICs rate from 13.8% to 15%
• increases the maximum Employment Allowance from £5,000 to £10,500
• removes the restriction that currently applies to the Employment Allowance where employers who have incurred a secondary Class 1 NICs liability of more than £100,000 in the tax year immediately prior to the year of the claim are unable to claim it — this means all eligible businesses and charities will be able to claim a greater reduction on their secondary Class 1 NICs liability, irrespective of what their secondary Class 1 NICs liabilities were in the tax year prior to the year of the claim

Policy objective

In order to help fix the foundations of the public finances and invest in public services the Government is reducing the threshold for secondary Class 1 NICs and increasing the secondary Class 1 NICs rate.

Alongside the reduction in the Secondary Threshold and increase to the secondary Class 1 NICs rate, the Employment Allowance will be increased to protect the smallest businesses by providing more relief of up to £10,500 a year on their employer secondary Class 1 NICs liabilities. The removal of the £100,000 eligibility cap changes the nature of the Employment Allowance from a relief targeted at helping small businesses grow and incentivising employment, to a structural feature of the NICs system available to all eligible businesses.

This increase in employer NICs raises revenue for the NHS and increases funding for contributory benefits like the State Pension, easing wider pressures on the public finances. It contributes to the government’s announcement of £22.6 billion in additional day-to-day spending over two years for the Department of Health and Social Care, including the NHS.

Background to the measure

This measure was announced at Autumn Budget 2024.

Detailed proposal

Operative date

This measure will have effect from 6 April 2025.

Current law

The main provisions relating to the Secondary Threshold are set out in section 5, 6 and 9 of the Social Security Contributions and Benefits Act 1992 (SSCBA 1992), and the Northern Ireland equivalent. Section 5 SSCBA 1992 provides there will be a Secondary Threshold for every tax year specified in regulations. Regulation 10(d) of the Social Security Contributions Regulations 2001 (SSCR 2001) specifies that the weekly Secondary Threshold is £175 for tax year which began on 6 April 2024. Regulation 11(3A) SSCR 2001 specifies the Secondary Threshold for earnings periods other than a week.

The current rate of secondary Class 1 NICs of 13.8% is specified in section 9(2) of the SSCBA 1992 and the Northern Ireland equivalent. Section 10(5) SSCBA 1992 provides that the Class 1A NICs percentage in respect benefits in kind is the rate specified in section 9(2) SSCBA 1992. Section 10A(6) SSCBA 1992 provides that the Class 1B NICs percentage in respect income tax payable under a PAYE settlement agreement is the rate specified in section 9(2) SSCBA 1992.

The Employment Allowance took effect from 6 April 2014 and was introduced by sections 1 to 7 and schedule 1 of the NICs Act 2014. When it was first introduced it provided a relief of up to £2,000 a year per eligible employer against their secondary Class 1 NICs liabilities. The Employment Allowance currently provides a relief of £5,000 a year. From 6 April 2020 the Employment Allowance was restricted to employers with a secondary Class 1 NICs liabilities below £100,000 in the previous tax year.

Proposed revisions

This measure amends regulations 10 and 11 of the Social Security Contributions Regulations 2001, and makes consequential changes to reduce the Secondary Threshold for secondary Class 1 contributions from £9,100 to £5,000 a year.

This measure will increase the rate of secondary Class 1 NICs specified in section 9(2) SSCBA 1992 from 13.8% to 15% for all employers with a secondary Class 1 NICs liability. This will lead to a commensurate increase in the rates of Class 1A and 1B NICs by virtue of sections 10(5) and 10A(6) SSCBA 1992.

This measure also amends the NICs Act 2014 to increase the annual maximum amount of Employment Allowance from £5,000 to £10,500 a year. This measure also reforms the Employment Allowance eligibility condition in NICA 2014 by lifting the restriction placed on employers with secondary Class 1 NICs liabilities over £100,000 in the tax year immediately prior to the claim.

Summary of impacts

Exchequer impact (£ million)

Year	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028	2028 to 2029	2029 to2030
Yield (£ million)	0	+23,770	+23,690	+24,170	+24,930	+25,710

These figures are set out in Table 5.1 of Autumn Budget 2024 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Budget 2024.  

Economic impact

In their October 2024 Economic and Fiscal Outlook, the Office for Budget Responsibility (OBR) estimated the increase in employer NICs will reduce the level of potential output by 0.1% at the forecast horizon, by reducing labour supply by around 50,000 average hours equivalent. The OBR judged that the increase in costs to businesses would lead to lower wages and profits. The OBR also expect that in the near-term the measure will add 0.2% to the level of the CPI as a result of firms passing on part of the cost of the measure to consumer prices.

Impact on individuals, households and families

Secondary Class 1 NICs are levied on employers rather than individuals.

Depending on employers’ behavioural response, individuals may be impacted indirectly by changes to the secondary Class 1 NICs rate and Secondary Threshold and the Employment Allowance, as assessed by the OBR and laid out in their October 2024 Economic and Fiscal Outlook (EFO).

The measure is not expected to impact on family formation, stability or breakdown.  

This measure is expected overall to have no impact on an individual’s experience of dealing with HMRC, as the change only affects the processes or tax admin obligations of their employer.

Equalities impacts

Secondary Class 1 NICs are levied on employers rather than individuals. There are therefore no direct equalities impacts.

As above, the measure may have indirect impacts on individuals. It is not possible to assess if there will be differential impacts to groups sharing protected characteristics.

Impact on business including civil society organisations

This measure will impact around 1.2 million employers. Around 250,000 employers will see their Secondary Class 1 NICs liability decrease and around 940,000 will see it increase. Around 820,000 employers will see no change. Overall, more than half of businesses with NICs liabilities next year will either gain or will see no change in their secondary Class 1 NICs liabilities. One-off costs will include familiarisation with this change and updating software.

This measure is expected overall to have no impact on businesses’ experience of dealing with HMRC as we expect the reporting processes to be in line with existing methods of reporting to HMRC. The experience of some small businesses is expected to change in circumstances where all of their employees earn below the Lower Earnings Limit (LEL). Previously, they would not be required to send a Real Time Information (RTI) return to HMRC. The changes in this measure will mean these employers will now need to submit RTI returns if any of their employees earn above the Secondary Threshold.

This measure is not expected to impact civil society organisations, other than in their capacity as an employer.

Operational impact (£ million) (HMRC or other)

HMRC will need to make IT changes to support implementation of this measure. These changes are expected to cost in the region of £900,000.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through information collected from Real Time Information returns.

Further advice

If you have any questions about this change, please contact HMRC at nics.policy@hmrc.gov.uk