Navigating the 2025 National Insurance Reforms

On 30 October, The Chancellor, Rachel Reeves delivered the first budget of the new Labour government. Notable announcements included the increase in employers national insurance contributions and a reduction to the threshold at which contributions start.

From 6 April 2025 the rate of employers national insurance contributions (NIC) will increase from 13.8% to 15%. Along with this increase, the threshold at which point these contributions are paid will reduce from £9,100pa to £5,000pa. In a bid to ease this additional cost, the Employers Allowance was increased from £5,000 to £10,500. These measures have been estimated to generate additional revenue for the government of £25 billion per year.

So what options do firms have to combat this cost increase?

1. Increase fees charged to clients by increasing fixed fees and /or charge out rates –potentially the most obvious option available to firms would be to increase fees, but this does not necessarily sit well with certain ethical considerations such as building trust and transparency in the sector and ensuring adequate legal services are available to all. If this option is not followed by all firms, the firms that do go down this road could end up pricing themselves out of the market.
2. Reduce costs elsewhere – this may be a perfect opportunity for firms to review their cost base and financial budgets. Are there areas of overspend or unnecessary spend in the firm? For example, is there a firm wide strategy for CPD and training or do each of the qualified team members arrange their own, meaning that training may be duplicated or irrelevant? Consideration could also be given to spend such as software licenses – is the firm overpaying for these as licenses haven’t been cancelled if team members have left?
3. Re-evaluate headcount / recruitment – an unpleasant solution may be to reduce headcount. With the advancement of technology and AI, certain processes within the firm may be able to automated, thus reducing the need for a team of individuals to perform these tasks. Another option may be to re-evaluate planned future recruits, for example, instead of hiring graduates, could the firm hire school leavers on an apprenticeship scheme which would generally be a cheaper option? There are also ways to save costs during the recruitment process - does the firm have a referral scheme for team members to refer potential new recruits? This type of scheme can be rewarding for employees and cheaper than paying recruitment agencies.
4. Review remuneration packages – an option for firms may be to limit salary increases. On the surface this may seem less than ideal, however, increasingly salary is not always the main driver employees. Firms could offer team members greater working flexibility or benefits that are exempt from NIC in the absence of pay increases. Firms could also consider implementing salary sacrifice schemes which allow employees to swap salary for non-cash benefits such as pension contributions, childcare vouchers and cycle to work scheme. These schemes reduce the employees gross salary on which the national insurance contributions are based.

It is unlikely that one of these options in isolation will be a suitable solution to compensate firms for the increase in the national insurance cost burden, but more likely that firms will need to consider a mix of the above to recover this additional spend.