Understanding Payroll Changes in the Autumn Budget for Business Owners

Introduction to Autumn Budget Payroll Changes

The Autumn Budget often brings a slew of changes that can impact businesses in various ways. This year, the focus is on payroll adjustments that business owners need to understand to ensure compliance and optimize their financial strategies. Whether you're a small business owner or manage a larger enterprise, staying informed about these changes is crucial for effective financial planning.

Key Payroll Adjustments

One of the most significant changes in this year's budget are the changes to National Insurance Contributions (NICs) for employers. The threshold for NICs has been adjusted, impacting both employers and employees. It's essential for businesses to update their payroll systems to accommodate these new thresholds and ensure accurate deductions.

A second change is the national minimum wage increasing. 

Both of these changes come into effect from April 6th 2025.

What is changing?

National Insurance for employees

Employees are liable to primary Class 1 NICs on their earnings if they exceed the Lower Earnings Limit (LEL). The LEL is set at £123 per week for 2024-25. However, an employee only starts paying NI when they earn over the primary threshold (PT), which is set at £242 per week. In effect, while no NIC is paid on earnings between these two thresholds, the NIC is ‘treated as paid’, which maintains their entitlement to contributory benefits for that payment period.

Earnings above the PT are charged NICs at a rate of 8%, subject to a cap at the upper earnings limit (UEL), which is set at £967 per week. Earnings above the UEL are charged NICs at a rate of 2%.

The LEL for 2025-26 will be increased from £123 per week to £125 per week. However, the PT will remain the same at £242 per week. The UEL is also being kept at its current threshold of £967 per week for 2025/26.

This means that there will be no change to the amounts of NI an employee pays in 2025/26, when compared to the current tax year.

National Insurance for employers

Employers pay secondary Class 1 NICs on employee earnings at a rate of 13.8% on earnings above the secondary threshold (ST). The ST is set at £175 a week for 2024/25. Employers are also liable to pay Class 1A NICs on benefits provided for employees, and Class 1B NICs on PAYE Settlement Agreements (PSAs), both at a rate of 13.8%. These amounts are on top of the salary they pay their employees.

Small employers can claim the ‘employment allowance’. This provides a flat rate deduction for businesses and charities against their annual employer NICs bill, currently set at up to £5000 if you are eligible.

For 2025-26 the employers ST is being reduced from £175 per week to £96 per week. This means that employers will have to begin paying employer Class 1 NI on lower earnings, and at a higher rate of 15%.

To help, the employment allowance will increase from £5,000 to £10,500, but the tax-free employers NIC band drops from £9,100 to £5,000 per employee. 

Minimum wage

The minimum wage is increasing from £11.44 to £12.21 for ages 25 and over. 

18+ see a rise from £8.60 to £10.00.

Under 18 and apprentices will see a rise from £6.40 to £7.55.

This will likely have a knock on effect to employees bring paid above this rate, as they don't like to see the gap closing!

Implications for Small Businesses

For small business owners, these payroll changes can have a pronounced impact. The increase in NICs may lead to higher operating costs, affecting cash flow and profitability. However, there are also opportunities to leverage certain tax reliefs and incentives introduced in the budget to mitigate these effects.

Adapting to Payroll System Updates

Updating your payroll system is a critical step in adapting to the changes introduced in the Autumn Budget. Ensure that your software is configured to apply the new tax bands and NIC thresholds correctly. Failing to do so could result in compliance issues and potential penalties.

Many payroll service providers offer updates and support during budget change periods. Consider reaching out to your provider for assistance or guidance on implementing these updates seamlessly into your existing systems.

Employee Communication

It's also important to communicate any changes in payroll calculations to your employees. Keeping your team informed about how their take-home pay might be affected can prevent misunderstandings and build trust within your organization. Providing transparent information about adjustments helps maintain morale and confidence among staff members.

Leveraging Tax Reliefs and Incentives

The Autumn Budget doesn't just bring challenges; it also presents opportunities for savvy business owners. Alongside changes in payroll, several tax reliefs and incentives have been introduced to support businesses during economic recovery phases. These include extended investment allowances and reliefs for research and development activities.

By taking advantage of these incentives, businesses can offset some of the increased costs associated with payroll changes, thus maintaining a healthy balance sheet.

Conclusion: Staying Ahead of Changes

Navigating payroll changes can seem daunting, but with the right approach, it becomes manageable. By staying informed, updating systems promptly, and communicating effectively with your team, you can turn potential challenges into opportunities for growth and stability.

As a business owner, being proactive in understanding and implementing these changes will not only ensure compliance but also help you make strategic decisions that benefit your business in the long term.