As we continue our series of insights exploring why Employee Ownership should be considered, we look at National Insurance Contributions (“NIC”) and how an Employee Ownership Trust (“EOT”) can lighten the load.
The recent Budget announcements about NIC bring significant changes for employers. These adjustments will result in higher costs for businesses, particularly those with large workforces, although the impact could be felt across all employers. We explore the financial impact of these changes and highlight the potential role of EOTs in helping to mitigate the issues arising whilst still supporting employee motivation and retention in a cost-efficient manner.
The Budget confirmed that, from 6 April 2025, employee NIC rates will increase from 13.8% to 15% and that the NIC exempt band (secondary threshold) is reducing from £9,100 to £5,000.
The effect on employers could be significant.
By way of example, if an employee has 40 employees that are each paid £35,000, then under the old rules the first £9,100 of salary for each employee was employer NIC free. The balance of £25,900 each would have been subject to 13.8% NIC, so £3,574 of employer NIC per employee. The salary plus NIC meant a total cost of £1,542,960. With the new rules, only the first £5,000 is NIC free and the balance of £30,000 will be subject to NIC at 15%, so the employer NIC cost is £4,500. The salary plus employer NIC meant a total cost of £1,580,000. This is an increase of £37,040 which is approximate to one person’s salary plus NIC.
This increase in NIC costs may tempt some employers to freeze planned salary increases or bonuses, or even to make redundancies.
An EOT is unlikely to directly solve these issues, but an employer under an EOT structure who is considering making such unpleasant decisions can at least consider turning to paying a tax free (but not NIC free) EOT bonus (up to £3,600 per employee per year) as a means of helping to keep staff motivated, as it allows them to deliver higher net pay to employees, whilst managing their own costs.
For example, an employer within an EOT structure could pay a tax-free bonus of £3,600 per employee and each employee would receive £3,312 after employee NIC. The employer would incur employer NIC of £540 per employee or a total employer NIC cost of £21,600 with 40 employees. Outside of an EOT, paying £3,312 net would have required a gross payment of £4,600 on which the employer NIC cost would be £690 per employee or a total employer NIC cost of £27,600 - a saving of £6,000 per year to the employer whilst delivering the same net funds to employees.
The level of tax free EOT bonus has remained static for some time now such that inflation has eroded their appeal. There are calls within the Employee Owned community and the tax industry to increase the level of tax free bonuses in line with inflation, and to make them both tax and NIC free (for employees at least). Whilst it remains to be seen whether this is done, it would clearly add further to the appeal of EOTs.
The increases in NIC rates and threshold reductions will undoubtedly strain many employer budgets, particularly for those managing larger teams. While EOTs may not directly offset these higher costs, and come with many other considerations besides bonuses, they provide a valuable option for easing financial pressure by enabling tax-free bonuses that deliver higher net pay to employees at a lower cost to employers.
There are of course other methods to reward staff tax efficiently which employers should review. Our team of experts is here to guide you through the benefits of EOT bonuses (and the wider benefits of EOTs) and other strategies.
