The VAT flat rate scheme is a simplified flat rate scheme which can be used by smaller businesses to save work. Under the scheme, businesses pay a set percentage of their VAT inclusive turnover to HMRC rather than the difference between the VAT that they charge and the VAT they suffer on the goods and services that they buy. The percentage that they need to pay depends on the sector in which they operate, and also on whether they are a limited cost business. The main advantage of the scheme is that it reduces the work in complying with VAT. For example, there is no need to record the VAT on purchases. However, for some businesses this may come at a cost, as the amount that they pay over to HMRC may be more than would be payable under traditional VAT accounting. Before joining the scheme, it is advisable to do the sums.

Eligibility

A business is eligible to join the scheme if it is VAT registered and it expects its VAT taxable turnover to be £150,000 or less in the next 12 months. This is everything that is sold that is not exempt from VAT. However, a business is not allowed to rejoin the scheme if it has used it previously and left within the previous 12 months. The VAT flat rate scheme cannot be used by businesses that use a margin or capital goods scheme, nor can it be used with the cash accounting scheme; instead, the flat rate scheme has its own cash-based method to determine turnover.

A business must leave the scheme if, on the anniversary of joining, its turnover in the last 12 months was more than £230,000 including VAT, or it is expected to be so in the next 12 months. A business must also leave if they expect their turnover in the next 30 days to be more than £230,000 including VAT.

The flat rate

The flat rate depends on the type of business. The percentages can be found on the Gov.uk website at www.gov.uk/vat-flat-rate-scheme. A business benefits from a discount of 1% in its first year of VAT registration.

Businesses that are classed as a limited cost business pay a higher rate of 16.5% regardless of the sector in which they operate. This is a business whose spend om relevant goods is less than either 2% of its turnover or £1,000 a year (£250 a quarter) if more than 2% of turnover. Where costs are close to 2% of turnover, the business may need to perform the calculation each quarter to ascertain whether they need to use the limited cost business percentage of 16.5% or that for their sector.

Not everything that a business purchases counts as ‘goods’ for the purposes of the calculation – only ‘relevant goods’ count. The main exceptions are services, such as accounting and advertising, car fuel (unless the business operates in the transport sector) and rent. Where a business incurs significant costs on services or fuel but their other goods amount to less than 2% of their turnover, they may be better off using traditional accounting. The limited cost business percentage of 16.5% of VAT inclusive turnover equates to 19.8% of VAT exclusive turnover, leaving only a narrow margin to cover any VAT suffered.

Example

A photography business joins the VAT flat rate scheme and in its first quarter has VAT inclusive turnover of £24,000 (£20,000 plus VAT). Its relevant goods in the quarter are £1,250. As this is more than 2% of the turnover, the business is not a limited cost business.

The flat rate percentage for its sector is 11%. However, as it is in the first year as a VAT registered business it benefits from a discount of 1%. Therefore, it must pay VAT of £2,400 to HMRC (10% of £24,000).

Capital goods

If you opt for the flat rate scheme, you will not normally be able to claim back VAT separately on capital goods unless they cost more than £2,000 and you do not intend to resell them.

The payment of National Insurance contributions is linked to entitlement to the state pension. If sufficient National Insurance contributions of the right type are paid for a tax year, that year counts as a qualifying year for state pension and benefit purposes. A person may also secure a qualifying year if they are awarded National Insurance credits for that year. This may be because they have low earnings or are in receipt of certain benefits, such as child benefit or carer’s allowance.

People reaching state pension age on or after 6 April 2016 need 35 qualifying years for a full state pension and at least ten qualifying years to receive a reduced state pension.

Different classes of NIC

Employed and self-employed earners pay different classes of contribution. Employed earners pay Class 1 contributions if their earnings exceed the primary threshold. For 2024/25 this is set at £242 per week, £1,048 per month and £12,570 per year. However, where their earnings are between the lower earnings limit (set at £123 per week, £533 per month and £6,396 per year) and the primary threshold, the employee is treated as if they had paid National Insurance contributions, albeit it at a zero cost. Where earnings in the tax year are equal to 52 times the weekly lower earnings limit (so, £6,396 for 2024/25), the earner secures a qualifying year for state pension purposes. Employed earners whose earnings are below this level will not build up state pension entitlement via their earnings. Contributions payable by the employer (secondary Class 1, Class 1A and Class 1B) do not provide any pension or benefit rights for employees.

Self-employed earners now build up entitlement through the payment of Class 4 contributions, in respect of which a liability arises where their profits from self-employment are more than the lower profits limit (set at £12,570 for 2024/25). Where profits are between the small profits threshold (set at £6,725 for 2024/25) and the lower profits limit, the self-employed earner receives a National Insurance credit which provides them with a qualifying year.

For 2023/24 and earlier tax years, self-employed earners built up their state pension entitlement through the payment of Class 2 contributions; for 2023/24 and earlier tax years, the payment of Class 4 contributions did not provide any pension or benefit rights.

Self-employed earners whose profits are below the small profits threshold can pay voluntary Class 2 contributions to preserve their state pension entitlement.

Voluntary Class 3 contributions

Individuals who will not have 35 qualifying years by the time that they reach state pension age may want to pay voluntary Class 3 contributions in order to boost their state pension. However, before paying the contributions, it is important to check that doing so will be beneficial. An individual can check their National Insurance record and state pension forecast online on the Gov.uk website or via the HMRC app. Making voluntary contributions is only worthwhile if a person will not otherwise have 35 qualifying years when they reach state pension age and if, after making the contributions, they will have at least ten qualifying years. This is the minimum needed for a reduced state pension. An individual may also be able to pay voluntary contributions if they have reached state pension age and want to plug gaps in their record to boost their state pension.

Class 3 contributions for 2024/25 are payable at the rate of £17.45 per week. Class 3 contributions must normally be paid no later than six years from the end of the tax year to which they relate (so by 5 April 2031 for 2024/25 contributions). Where contributions are paid after the end of the tax year to which they relate, they are usually paid at the current rate where this is higher. Individuals who have gaps in their National Insurance record between 6 April 2006 and 5 April 2016 can make voluntary contributions at the 2022/23 rate of £15.85 per week until 5 April 2025 to plug those gaps.

Self-employed earners with profits below the small profits threshold can pay voluntary Class 2 contributions instead of voluntary Class 3. This is a much cheaper option (£3.45 per week for 2024/25 rather than £17.45 per week). They can also plug gaps in their record between 6 April 2006 and 5 April 2016 by making contributions at the 2022/23 Class 2 rate of £3.15 per week by 5 April 2025.

A combination of higher interest rates and stealth taxation may mean that you are now paying tax on savings income for the first time. If this is the case, it may be worth taking out an Individual Savings Account (ISA) to enjoy more of your investment income tax-free. ISAs are available from a number of financial institutions, including banks and building societies, credit unions, friendly societies, stockbrokers, peer-to-peer lending services and crowdfunding companies.

There are different types of ISAs for persons aged 18 and over:

• cash ISA;
• stocks and shares ISA;
• innovative finance ISA;
• Lifetime ISA.

The previous Government had announced plans to introduce a British ISA. However, the current Government are not going ahead with it.

There is also a Junior ISA for children under the age of 18.

ISA limit

There is an annual ISA investment limit of £20,000 in a tax year. The limit may be invested in a single account or spread across different types of accounts. The maximum amount that can be invested in a Lifetime ISA is £4,000 a year. Spouses and civil partners each have their own limit.

A separate limit of £9,000 per year applies to Junior ISAs.

Cash ISA

Savings in a cash ISA can be held in bank and building society accounts and in some National Savings products. Interest earned on savings held within a cash ISA is tax-free.

Stocks and shares ISA

Investments within a stocks and shares ISA can include shares in companies, unit trusts and investment funds, corporate bonds and Government bonds. However, shares owned in a personal capacity cannot be transferred into a stocks and shares ISA, although it is possible to transfer shares from an employee share scheme into an ISA.

Income and gains from the investments held within the ISA are tax-free.

Innovative finance ISA

Investments within an innovative finance ISA can include peer-to-peer loans (i.e. loans given to other people or businesses without using a bank), crowdfunding debentures (i.e. investments in a business by buying its debt) and funds where the notice or redemption period means that the funds cannot be held in a stocks and shares ISA. Arrangements that are already in existence outside the innovative finance ISA cannot be transferred into an innovative finance ISA. Income and gains on investments within an innovative finance ISA are tax-free.

Lifetime ISA

A Lifetime ISA is designed to help people to save either for their first home or for retirement. Cash and stocks and shares can be held in a Lifetime ISA. Returns are tax-free. Lifetime ISAs also benefit from a tax-free Government bonus equal to 25% of the amount saved, capped at £1,000 a year. However, there are more conditions than for other ISAs.

The maximum amount that can be invested in a Lifetime ISA is £4,000 a year. This counts towards the overall limit on investments in ISAs, set at £20,000 per tax year.

A person must be aged 18 or over and under 40 to open a Lifetime ISA and the first payment must be made into the account before the individual turns 40. Once an account is open, the individual can continue to contribute up to £4,000 a year until they reach the age of 50. Beyond age 50, the account remains open and will continue to earn interest, but no further deposits can be made and no further government bonuses will be paid.

Money can only be withdrawn from a Lifetime ISA without penalty where it is used to buy a first home once the individual has reached age 60 or if they are terminally ill with less than 12 months to live.

On the face of it, the 25% Government bonus makes a Lifetime ISA an attractive option for saving for a deposit for a first home. However, the money in a Lifetime ISA can only be used in this way if the home is purchased with a mortgage and does not cost more than £450,000. In London and other areas with high property prices, buyers may struggle to find a first home within this price bracket. If a first home is purchased for more than this, the saver has the choice of either leaving the funds in the account until they reach the age of 60 or withdrawing the money saved and forfeiting the government bonus. The bonus will be clawed back if the funds are withdrawn other than for one of the three permitted reasons.

Junior ISAs

A Junior ISA is a long-term tax-free savings account for children. There are two types of Junior ISA, a cash ISA or a stocks and shares ISA and a child can have one or both types. The account can be opened by a parent or a guardian with parental responsibility. However, the money belongs to the child. As any interest is tax-free and not taxed on the parent, a Junior ISA is an attractive option for a parent wishing to save for their child. The child can take control of the account when they reach the age of 16, but cannot withdraw the money until they turn 18.

As the cost of living crisis continues to bite, you may find that come 31 January 2025 you are struggling to pay your Self Assessment tax bill. If this is the case, it is important that you do not bury your head in the sand – the bill will not go away and, with the addition of interest and penalties, will become bigger. However, there are options available which may allow you to pay what you owe over a longer period.

Coding out

If you filed your 2023/24 tax return online by 30 December 2024 or filed a paper return before 31 October 2024 and you have PAYE income, if you owe £3,000 or less, HMRC will collect what you owe by adjusting your tax code for 2025/26. This effectively allows you to pay in interest-free instalments and is something of a good deal.

Time to Pay Arrangements

To spread the cost, you may be able to pay your bill in instalments by setting up a Time to Pay Arrangement with HMRC. You may be able to do this online if all of the following apply:

1. You have filed your 2023/24 tax return.
2. You owe £30,000 or less.
3. You are within 60 days of the 31 January deadline.
4. You do not have any other payment plans with HMRC.

You can do this by logging into your HMRC account.

If you are unable to set a plan up online, you may be able to do so by calling HMRC on 0300 200 3820. You will need to provide details of your income and outgoings.

Where an arrangement is set up, you will be charged interest on the tax paid after the due date. However, penalties are not applied. The arrangement is designed to be flexible and if you are able to you can clear it early to save interest. If you struggle to meet the repayments under the arrangement, the best course of action is to contact HMRC to try and renegotiate the agreement, for example to pay your tax over a longer period. If you fall behind or do not pay what you owe and do not agree a revised plan with HMRC, they may take action to recover what you owe.

HMRC currently charge interest at 2.5% above base. This is to increase to 4% above base from April 2025. If you are able to borrow money at a lower rate, it may be preferable to take out a loan to pay your tax than to use a Time to Pay Arrangement.

Budget Payment Plans

Looking ahead, you may find it easier to set aside some money to pay your tax bills. While you can simply have a separate bank account for this purpose, you may prefer instead to set up a Budget Payment Plan with HMRC so that you cannot dip into the account in the year. A Budget Payment Plan allows you to put money aside for your next Self Assessment bill by making regular weekly or monthly payments to HMRC. If the amount put aside is less than the amount you owe, the balance must be paid by the due date. If you have put aside more than you need, you can ask for a refund. You can pause payments for up to six months.

As long as your tax affairs are up to date, you can set up a Budget Payment Plan through your online HMRC account.

Review payments on account

If your 2023/24 tax and Class 4 NIC bill is more than £1,000 and you do not pay at least 80% of your tax through deduction at source, such as via PAYE, you will need to make payments on account of your 2024/25 tax liability. Each payment is 50% of your tax and Class 4 bill for 2023/24 and payments are due on 31 January 2025 and 31 July 2025. It is advisable to review your payments on account. If your income has fallen and you expect to owe less for 2024/25 than for 2023/24, you can opt to reduce your payments on account. However, if you reduce them too much, interest will be charged on the shortfall.

If you are self-employed, you will pay tax on your taxable profit. In working out your taxable profit, you can deduct certain expenses that you have incurred in running your business. The basic rule is that expenses can be deducted if they are incurred wholly and exclusively for the purposes of the trade.

This rule precludes a deduction for private expenditure. Where possible, it is advisable to use separate bank accounts for business and personal expenditure to keep them separate and reduce the risk of missing business expenses or deducting private expenses in error.

Where an expense has both a private and a personal element, it is permissible to claim a deduction for the business part, as long as the business expenditure and the private expenditure can be identified separately. This may be the case, for example, where a car is used for both business and personal travel. Here a deduction for business travel could be claimed using the simplified rates published by HMRC. However, where it is not possible to separate the business and personal costs and the expenditure has a dual purpose, a deduction is not permitted. An example of this would be everyday clothes worn for work, as even if the clothes are only worn for work, they also provide the personal benefits of warmth and decency.

If you use the cash basis, you can claim a deduction for revenue expenditure and also capital expenditure where it is of a type for which a deduction is allowed under the cash basis. However, if you use traditional accounting, you can only deduct revenue expenditure; relief for capital expenditure is given in the form of capital allowances.

Typical expenses

A business may incur some or all of the following expenses, which can be deducted in calculating its taxable profit, as long as the costs are incurred wholly and exclusively for the purposes of the business:

• Office costs, such as stationery and printing costs and phone bills
• Travel costs, such as fuel, train, taxi and bus fares, or parking
• Uniforms bearing the business’s logo or name (but not ordinary everyday clothing)
• Goods purchased for resale
• Raw materials
• Costs related to the business premises, such as rent, light and heat
• Insurance
• Advertising or marketing costs.

Trading allowance

Rather than claiming a deduction for your actual expenses, you can instead opt to deduct the £1,000 trading allowance. This will be advantageous if your actual expenses are less than £1,000. If your gross trading income (before deducting expenses) is £1,000 or less, you do not need to pay tax on it, or report it to HMRC.

Simplified expenses

To save work, instead of deducting actual expenses in relation to vehicles and expenses incurred if you run your business from home, you can use simplified expenses to work out the deduction. You can also use simplified expenses to work out the private use disallowance if you live in your business premises (as might be the case, for example, if you run a Bed and Breakfast).

Records

It is important to keep good business records so that you can identify your expenses and take them into account when working out your taxable profit. If you overlook deductible expenses, you will pay more tax than you need to.

Under Making Tax Digital for Income Tax Self Assessment (MTD for ITSA), sole traders and unincorporated landlords within its scope will be required to keep digital records of their trading and/or property income and provide quarterly updates to HMRC using MTD-compatible software. Its introduction is being phased in.

Phase 1 – April 2026 start date

From 6 April 2026, MTD for ITSA will apply to sole traders and unincorporated landlords whose combined taxable business and property income exceeds £50,000 a year. It is important to note that the trigger is the total from both sources. For example, a sole trader with business income of £40,000 who also has property income of £12,000 will need to comply with MTD for ITSA from 6 April 2026 regardless of the fact that separately neither business nor property income exceed £50,000.

Phase 2 – April 2027 start date

The MTD for ITSA mandation threshold is lowered to £30,000 from 6 April 2027. From that date, sole traders and unincorporated landlords with business and/or property income of more than £30,000 must comply with the requirements of MTD for ITSA.

Phase 3 – by the end of the current Parliament

At the time of the 2024 Autumn Budget, the Government announced that sole traders and unincorporated landlords with business and/or property income of more than £20,000 will be brought within the scope of MTD for ITSA by the end of the current Parliament. The precise date has yet to be announced – this will be done at a future fiscal event.

Plan ahead

It is important that sole traders and unincorporated landlords know their MTD start date and that they are ready to comply with the requirements of MTD for ITSA from that date. To do so, they will need to use MTD-compatible software. Details of software that ticks this box can be found on the Gov.uk website.

Business Asset Disposal Relief (BADR) is a valuable relief which reduces the rate of capital gains tax payable on gains made on the disposal of all or part of a business or the sale of shares in a personal trading company. The relief was previously known as Entrepreneurs’ Relief.

A sole trader selling all or part of their business must have owned the business for at least two years prior to the date of sale. The same test must be met where the business is being closed and the assets are being sold. Here the assets must be disposed of within three years after the date of cessation to qualify.

The relief is also available in respect of the disposal of shares or securities in a personal company that is either a trading company or the holding company of a trading group. A personal company is one in which the shareholder holds at least 5% of the ordinary share capital and that holding gives the shareholder at least 5% of the voting rights, and entitlement to at least 5% of the profits available for distribution and 5% of the distributable assets on a winding up, or 5% of the proceeds in the event that the company is sold.

Lifetime limit

The favourable capital gains tax rates only apply on gains up to the lifetime limit of £1 million. Spouses and civil partners have their own lifetime limit.

Rate

For 2024/25, gains eligible for BADR are taxed at 10%.

Prior to 30 October 2024, the BADR rate was the same as the capital gains tax rate for gains other than residential property gains and carried interest applying where  income and gains fall within the basic rate band. However, the latter was increased to 18% from that date (Budget Day), while the rate of capital gains tax once the basic rate band has been used up was increased from 20% to 24%. This increased the value of BADR – meaning for the remainder of the 2024/25 tax year it is worth 14% where gains would otherwise be taxable at the higher capital gains tax rate – a potential saving of up to £140,000.

However, this is a limited time offer and the disposal must take place before 6 April 2025 to access the 10% rate. From 6 April 2025, gains benefitting from BADR will be taxed at 14% – a saving of up to 10%. From 6 April 2026, the rate rises to 18%, bringing it back into line with the capital gains tax rate applying where income and gains fall within the basic rate band.

Timing

The date of disposal is key to accessing the best rates. Selling a business or shares in a personal trading company on or before 6 April 2025 will access the best rate of 10%. Where a disposal is on the cards, as long as the qualifying conditions have been met for the requisite two-year period, consideration could be given to bringing forward the disposal date to before 6 April 2025. If the business has already ceased, disposing of the business assets before 6 April 2025 will minimise the capital gains tax payable.

If a disposal before 6 April 2025 is not feasible, consider whether the business, business assets or shares can be disposed of before 6 April 2026 so that gains up to the available lifetime limit are taxed at 14% rather than at 18%. Unincorporated landlords thinking of exiting the furnished holiday lettings business when the favourable relief comes to an end may also wish to bring forward the cessation and the disposal of their properties to access the 10% rate.

Under payrolling, employers deal with taxable benefits provided to employees through the payroll, treating the taxable amount of the benefit like additional salary and deducting the associated tax from the employee’s cash pay. Where a benefit is payrolled, the employer does not need to report it to HMRC via the P11D process after the end of the year. However, the benefit must still be taken into account in calculating the employer’s Class 1A National Insurance liability on their P11D(b).

Currently, payrolling is voluntary and employers who wish to payroll must register to do so before the start of the tax year from which they wish to commence payrolling – it is not possible to join in-year. However, this is to change as from 6 April 2026 payrolling will become mandatory for all but a couple of taxable benefits. At the time of the Autumn 2024 Budget, the Government confirmed that mandatory payrolling will go ahead as planned, and provided more details as to what it will look like.

Excluded benefits

Mandatory payrolling will apply to all taxable benefits in kind with the exception of employment-related loans and employer-provided living accommodation. Currently, it is not possible to payroll these benefits, but voluntarily payrolling will be introduced for both of them from April 2026, meaning that employers providing these benefits can choose either to payroll them voluntarily or report them to HMRC after the end of the tax year via the P11D process. For 2026/27 and later tax years, it will no longer be possible to report other benefits on a P11D. Employment-related loans and living accommodation will be brought within mandatory payrolling from a later date.

Taxable amount

To find out the amount to include in the payroll in respect of the payrolled benefit, employers will need to calculate the cash equivalent of the benefit and divide it by the number of pay periods in the tax year. Where an employee is paid monthly, 1/12^th of the cash equivalent of the benefit will be taxed through the payroll each month.

If the cash equivalent value changes during the year, as would be the case, for example, if an employee changed their company car, the employer would need to recalculate the cash equivalent value and revise the payrolled amount accordingly for the remainder of the tax year.

End of year process

Employers will be expected to ensure that the amounts that are reported for taxable benefits in kind are as accurate as possible. Corrections should be made as soon as possible if the value changes in-year. However, an end of year process is to be introduced to provide for amendments to the taxable value of benefits that cannot be determined in-year. Details of this are not yet available and will be provided in due course.

Reporting requirements

Following the move to mandatory payrolling, employers will need to provide more information than they currently need to do so under the voluntary system. From April 2026, Class 1A National Insurance contributions on benefits in kind will also be collected through the payroll, rather than after the end of the year as now, and the reporting requirements will be increased to facilitate this and also to provide a more granular breakdown of payrolled benefits in kind.

Employers looking to spread some seasonal cheer can do so in a tax-efficient manner by taking advantage of the exemptions for annual parties and functions and trivial benefits.

Christmas parties

The tax exemption for annual parties and functions will only apply to a Christmas party if the following conditions are met.

1. The event is an annual event – one-off events do not qualify.
2. The event is open to all employees or to all those at a particular location.
3. The cost per head (inclusive of VAT) is not more than £150.

Some points are worthy of note.

While it is permissible to provide an event for employees at a particular location or working within a particular department, all employees at that location or within that department must be invited. Events for staff of a particular grade only, for example, managers, fall outside the terms of the exemption, and as such their provision constitutes a taxable benefit.

The cost per head is the total cost of providing the function, including extras such as transport and accommodation, divided by the number of attendees (employees and guests). The total cost includes VAT, even if this is later recovered.

If the cost per head is more than £150, the whole amount is taxable, not just the excess over £150. Where a tax charge arises and the employee brings a guest, the taxable amount is the cost per head for both the employee and their guest (so £350 for an event where the cost per head is £175).

Where more than one annual event is held in the tax year, all will be tax-free if the total cost per head does not exceed £150. Where the total cost per head is more than this, the exemption can be used to best effect.

Gifts

The trivial benefits exemption allows employers to provide employees with low-cost gifts without triggering a tax charge under the benefits in kind legislation. The exemption will only apply if the following conditions are met.

1. The gift is not cash or a cash voucher.
2. The gift does not cost more than £50.
3. The employee is not contractually entitled to the gift.
4. The gift is not provided under a salary sacrifice arrangement.
5. The gift is not provided in recognition for services performed or to be performed.

The cost of the gift is the cost to the employer of providing it. Where a gift is made available to a number of employees and it is not practicable to determine the cost of each individual’s gift, the average cost can be used instead. Directors and office holders of close companies and members of their family or household can only receive £300 of tax-free trivial benefits a year; for other employees there is no limit.

Care must be taken where the gift comprises a season ticket, voucher or a benefit accessed using an app. Here the cost is the annual cost, rather than the cost each time the season ticket, voucher or app is used. This may bring the gift outside the scope of the trivial benefits exemption, even if the cost of each individual item or use is less than £50.

Consider a PSA

If a taxable benefit does arise in respect of the Christmas party or a gift, consider meeting the liability on behalf of your employees by means of a PAYE Settlement Agreement (PSA). It is the season of goodwill after all.

One of the key announcements in the Autumn 2024 Budget was the rise in employer’s National Insurance contributions from 6 April 2025. From that date, the rate of secondary Class 1 National Insurance contributions is increased by 1.2 percentage points, from 13.8% to 15%. In a further blow, the secondary threshold – the point above which employer contributions become payable – will fall from £9,100 to £5,000.

On the plus side, the Employment Allowance is to rise from the same date, from its current level of £5,000 to £10,500. This will protect the smallest employers from the impact of the hike. From 6 April 2025, larger employers will once again be able to benefit from the Employment Allowance as the current restriction which limits availability of the allowance to employers whose secondary Class 1 National Insurance bill in the previous tax year was less than £100,000 is lifted. However, personal service companies where the sole employee is also a director remain unable to claim the allowance.

The upper secondary thresholds that apply where the employee is under the age of 21, an apprentice under the age of 25, an armed forces veteran in the first year of their first civilian job since leaving the armed forces or a new employee in the first three years of their employment at a special tax site are unchanged. However, the 15% rate will apply to any earnings in excess of the relevant upper secondary threshold.

The rate increase also extends to Class 1A National Insurance contributions (payable by employers on taxable benefits in kind, taxable termination payments and taxable sporting testimonials) and to Class 1B National Insurance contributions (payable by employers on items within a PAYE Settlement Agreement and on the tax due under the agreement), both of which rise to 15% from 6 April 2025.

Impact

The impact of the changes will depend on the number of employees that an employer has and the amount that they are paid. For example, for an employee on £20,000, before taking account of the Employment Allowance, employer’s National Insurance will increase from £1,504.20 for 2024/25 to £2,250 for 2025/26 – an increase of £745.80. However, for an employee on £100,000, the bill will rise from £12,544.20 for 2024/25 to £14,250 for 2025/26 – an increase of £1,705.80.

Very small employers with only a handful of employees who are not highly paid may find that their bills fall as the increase in the Employment Allowance outweighs the rise in secondary contributions. For example, an employer with three employees paid £30,000 will pay £3,652.60 for 2024/25 after deducting the Employment Allowance but will only pay £750 in 2025/26 after deducting the Employment Allowance. At the other end of the scale, as press reports attest, the additional cost can be significant. Employers with a workforce comprised predominantly of lower paid part-time workers, as is often the case in the hospitality industry, will be hard hit by the fall in the secondary threshold. Currently, no contributions are payable on earnings below £9,100; from April 2025, employer contributions are due on earnings over £5,000.

Mitigation

Eligible employers should ensure that they claim the Employment Allowance as this is not given automatically. Consideration can also be given to the make-up of their workforce. For example, savings can be made by employing workers under the age of 21 or armed forces veterans looking for their first civilian job, as contributions are only payable where earnings exceed £50,270 rather than £5,000 – potential savings of up to £6,790.50 per employee. Taking on two part-time workers rather than one full-time worker will also cut the bill by accessing a further £5,000 NIC-free band (saving £750).

Employers should also review the taxable benefits that they provide, and consider instead a switch to exempt benefits to save the associated Class 1A National Insurance. Employers should also review existing PAYE Settlement Agreements to check whether they remain affordable.