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A Looming Payroll Crisis: Why Employers Must Act Now

Francis Hudson · Posted on: February 4th 2025 · read

The government’s upcoming changes to National Insurance (NI) and the National Living Wage (NLW) are set to deliver a seismic shift in payroll costs for businesses.

These changes represent a major financial threat to employers, particularly those with large workforces or employees earning at or near the NLW.

Employers must take immediate steps to estimate the additional costs, understand their financial position, and explore ways to mitigate the impact. Failure to act now could leave businesses struggling to absorb these increases.


The Big Changes: National Insurance

From 6 April 2025, employers will face:

  1. Higher NI Rates: The Class 1 Employer NI rate will increase from 13.8% to 15%, a significant hike in payroll taxes.
  2. Lower Secondary Threshold: Employers will start paying NI on earnings above £5,000, down from the current £9,100.
  3. Class 1a & 1b Changes: These higher rates will also apply to benefits in kind, further increasing costs.

While the Employment Allowance will increase from £5,000 to £10,500, this will only provide relief to smaller employers. For larger businesses, the financial impact will be unavoidable.

Example Impact – Employee on £75,000 Salary
The cost to a business employing someone at this salary will rise by £1,406 before corporation tax relief.

"Employers must take immediate steps to estimate the additional costs, understand their financial position, and explore ways to mitigate the impact."

Francis Hudson - Partner

The Big Changes: National Living Wage

From April 2025, the NLW will rise to £12.21 per hour for workers aged 21 and over, following the increase to £11.44 in April 2024. This will bring further increases to payroll costs, particularly for businesses with a high proportion of low-paid workers.

CategoryApril 2024April 2025% Increase
21 and over£11.44£12.216.73%
18 to 20£8.60£10.0016.27%
Under 18 & Apprentices£6.40£7.5517.97%

For a full-time 21+ employee working 35 hours per week, the cost to the company will rise by £2,409 before corporation tax relief or £1,807 after relief.


The Numbers Speak for Themselves

The financial threat becomes clear when we calculate the total additional cost for businesses employing multiple workers at the NLW.

Number of StaffIncrease Before CT ReliefIncrease After CT Relief

25

£60,225

£45,169

50

£120,450

£90,338

75

£180,675

£135,506

100

£240,900

£180,675

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For a full-time 21+ employee working 35 hours per week, the cost to the company will rise by £2,409 before corporation tax relief or £1,807 after relief.

Francis Hudson  Partner

For businesses with 100 NLW employees, the post-tax cost increase is nearly £181,000—a significant financial burden that could impact cash flow, profitability, and growth.

Why Estimating Your Costs Is Critical

Every business is different, but the message is the same: you must calculate your additional tax burden now. Employers need to consider:

  • The number of employees affected by the changes.
  • The impact of higher NI rates and the lower threshold.
  • The rising NLW and its knock-on effects on pensions and benefits.


What Can Employers Do?

While these changes are unavoidable, there are steps employers can take to reduce their financial exposure:

  • Estimate the Costs: Use the examples above to calculate the additional burden for your business. This will help you plan ahead and avoid cash flow surprises.
  • Salary Sacrifice: Encourage employees to exchange part of their salary for pension contributions, reducing NI liabilities.
  • Tax-Free Benefits: Offer benefits that do not attract NI, such as:
    • Small gifts (up to £50 per employee)
    • Annual staff events (up to £150 per head)
    • Mobile phones or small loans
  • Green Benefits: Provide electric cars or launch a Cycle to Work scheme to reduce taxable pay.

These strategies are limited for workers on the NLW due to strict minimum pay requirements.

Act Now to Protect Your Business

The combination of rising NI rates and wage costs represents a serious threat to employers, particularly those with larger or lower-paid workforces. By estimating your additional tax burden now, you can take proactive steps to manage the impact and protect your business. Employers are already planning and making key decisions about staffing levels.

Don’t wait until it’s too late—start planning today to ensure your business is prepared for these changes. For tailored advice and support, contact us now.


How MHA can help

Our tax experts understand the challenges that businesses and individuals face to meet the impact of ever evolving tax policy, and we can help you to navigate your compliance obligations.

Contact us For more information contact our private client tax team Contact the team
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