Following extensive speculation many of the more unusual proposals floated in the media have been removed. We are left with a significant increase in employment costs for businesses, in fact over half of the revenue raising measures in the Budget are accounted for by the increase to employer’s NIC.
She also announced some very significant changes which are likely to lead to fundamental changes to the temporary labour market.
NIC increase
Following extensive pre-budget speculation, the Chancellor confirmed that the rate of employer’s NIC will increase to 15% from April 2025.
While an increase in the main rate had been widely expected, what came as a surprise is that the threshold for employer contributions has also been reduced significantly to £5,000 (currently £9,100).
There is a slight positive change in that the employment allowance has been increased to £10,500 (currently £5,000) and will be available to larger employers.
To contextualise these changes, the following table estimates the significant impacts on employers and agencies:
No. Workers | Pay | Annual ER NIC – Current | Annual ER NIC – 2025/26 | Increase |
1,000 | NMW – 40 hours | £2,027,938 | £3,049,020* | 50.4% |
100 | UK Average | £339,425 | £419,943 | 23.7% |
*ER NIC calculations for 25/26 based on the newly announced NMW rates.
Thankfully, the Government has chosen to not impose employer’s NIC on employer pension contributions. Accordingly, salary exchange for pension contributions (SXP) remains a valid choice to mitigate the impact of increased NIC costs.
National Minimum / Living Wage
The main rate of the NLW will increase by 6.7% to £12.21/hour from April 2025.
The Government also wishes to bring the 18-20 rate up to parity with the main rate. The 18-20 rate will therefore increase by 16.3% to £10/hour from April 2025, with more increases expected in the coming years.
In the short to medium term there is the potential for this to result in a decrease in the relative attractiveness of younger, less experienced, workers to employers.
Umbrella companies
During her Budget, the Chancellor highlighted the significant tax losses derived from non-compliance of umbrella companies. The Government therefore intends to position responsibility for PAYE with agencies, or, where there is no agency, with end users that engage umbrella companies.
The proposals would inevitably simplify the task otherwise faced by HMRC of navigating legal complexities around who is actually the employer but are likely to have far-reaching impacts on how the temporary labour market operates.
To enact the changes that make agencies responsible for PAYE will require a relatively small change to the existing agency tax rules. For end-users of labour, the consultation process, prior to the changes impacting from 2026, will be vital to address heightened risks in relation to temporary labour and subcontracting arrangements, depending on the precise definition of an umbrella company. We can see this being of great concern to our client agencies and end-users in the construction, retail and haulage sectors.
Other changes
Although Electric Vehicle (EV) benefit in kind rates will increase they will still be incentivised over conventionally powered vehicles until at least 2029/30. There will be increased rates of Vehicle Excise Duty for non-EVs.
No changes have been announced to tax relief on pension contributions or to the tax-free lump sum.
The taxation regime for non-domiciled individuals will be fundamentally altered from 6 April 2025 and the concept of domicile will be removed from the tax system. The new Overseas Workdays Relief will be subject to an annual financial limit for each qualifying year.
No further freezing of income tax and employee NIC thresholds past April 2028. From this point thresholds will increase with inflation.
Further details have been announced regarding mandatory payrolling of benefits. It has been confirmed that this will take effect from April 2026.
Double cab pick up trucks will be classified as cars for benefit in kind and capital allowances purposes from April 2025. This will result in a significant increase in the cost of providing these vehicles to staff.
Legislation will be introduced to raise taxes on ‘contrived’ car ownership schemes. This appears to be targeted at the automotive sector but may also impact legacy employee car ownership schemes.
