After much speculation, the Chancellor of the Exchequer announced the much-anticipated increase in employer’s National Insurance (NIC) from 13.8% to 15.0% but also a reduction to £5,000 to the threshold when employers will be liable to pay NIC. The changes announced will have a significant impact on the hospitality sector. Businesses will no doubt be considering site headcount, pay rates, agency arrangements and potentially the impact on opening new sites.

Increase in employer’s National Insurance
Looking specifically at the impact the 1.2% increase in NIC will present, it will apply to both salaries and the provision of any taxable benefits in kind provided by employers. However, as the changes to the NIC rates will come into effect from April 2025, employers will have some time to ensure their payroll systems have been updated to take into account the new NIC rates. The new NIC rates will also be applicable to Class 1A in respect of the taxable benefits which will need to be reported on forms P11D. However, as the rates will apply from the next tax year, the full cost impact will not be noticed until 19/21 July 2026, when the Class 1A NIC liabilities are due for payment to HMRC. Where employers are already payrolling benefits in kind, then the uplifted Class 1A will apply from the April 2025 payroll.

It is also helpful that changes have not been made to the rules concerning the exemption from the payment of Class 1 NIC for employers with employees under 21 years of age on earnings up to the upper Secondary Threshold rate.

Employment (Allocation of Tips) Act 2023
Whilst there has been changes to the employer NIC rates, no changes have been made to the exemption which ensures that discretionary gratuities paid to employees via a tronc scheme has not been altered. No doubt, the sector will be under scrutiny to ensure businesses are fully complying with the Employment (Allocation of Tips) Act 2023, which became fully operational from 1 October 2024. November will see the first tronc distributions being paid away in accordance with the Act and many observers will be interested to see how the sector has coped with adopting the new rules.

National Minimum Wage
As well as the increase in employer’s NIC, the Government has also announced the increases to the National Minimum Wage (NMW) and National Living Wage rates (see table below) which will come into effect from 1 April 2025.

Many within the sector are concerned that the increases in both NIC and NMW will considerably hinder staff recruitment and any potential new site openings, which will have a detrimental impact on the economy. The bottom line is the increases in both NIC and NMW represent a true cost to the sector, so what can employers consider helping mitigate these increases?

One saving grace is the Government has not made any changes in tax relief on employees’ pension contributions. Furthermore, if NIC will not be levied on employer pension contributions, then Pension salary exchange can be used to mitigate the increase in employers NIC.

If you do not provide your employer pension in conjunction with a pension salary exchange arrangement, then this will be an ideal time to consider implementing such an arrangement, the benefits of which include:

• Providing pensions in a National Insurance efficient manner.
  Encourage employees to think about their saving for their retirement.
• Increase employee engagement.
• Help with staff retention.
• Help employers to maximise their salary budget.

Care needs to be taken to ensure employees are not paid below the new NMW hourly rates of pay. This may mean the use of pension salary exchange may be limited to Head Office or those employees who are not hourly paid, but it is certainly something which should be considered, especially at a time when there are limited opportunities to help manage the burden of increased employer costs.

If you would like to discuss how any of these changes may affect your hospitality business, please get in touch with Nick Bustin, Employment Tax Director.