Employer National Insurance reforms in the Autumn Budget 2024

PolicyEngine projects the reforms to employer NI would raise £23 billion in 2025 and affect two thirds of people.

Credit: World Economic Forum/Walter Duerst

See the full impact on PolicyEngine here.

The Chancellor Rachel Reeves has announced reforms to employer National Insurance (NI) contributions, marking the most substantial revenue-raising measure in the Autumn Budget 2024. The changes include raising the main rate from 13.8% to 15.0% while simultaneously lowering the Secondary Threshold at which employers begin contributing from £9,100 to £5,000 per year. Additionally, Reeves has raised the Employment Allowance from £5,000 to £10,000 and eliminated its cap. This analysis focuses on the rate rise and threshold reduction.

Employers currently pay NICs of 13.8% on employee earnings above £175 per week (£9,100 per year). Last week, The Times reported that the Chancellor was expected to raise the employer NI rate by “between one and two percentage points”, and “make a ­’significant’ cut to the earnings ­thresholds at which employers start making national insurance contributions.” Reeves did so, increasing the rate by 1.2p to 15.0%, and lowering the threshold to £5,000 per year.

The Employment Allowance is a tax relief for small businesses that reduces National Insurance liabilities, available to companies whose National Insurance payments were below £100,000 in the previous tax year.

As I wrote in the Institute for Economic Affairs blog last week, the extent to which employers pass on NIC rises to workers in lower wages can affect revenues by up to a factor of two, due to interactions with tax and benefit changes. In line with the empirical literature, we assume that employers pass on 40% of the NIC change in the first year, rising 10 percentage points per year up until stabilising at 70% by 2028.

Using PolicyEngine's open-source model, we estimate both the budgetary and distributional impacts of these NI changes. Our analysis incorporates behavioural responses, though we also provide static estimates for comparison with official figures.

We project that the employer NI reforms will raise £108.4 billion over five years when accounting for behavioural responses. This represents the largest revenue source among the Budget's major tax changes. The yearly breakdown shows:

The declining revenue profile reflects our modelling of behavioural responses, particularly the increasing wage pass-through from employers to employees over time. Without these behavioural effects, we estimate the reform would raise £147.0 billion - nearly £40 billion more.

HM Treasury and the Office for Budget Responsibility (OBR) do not publish budgetary impact estimates of the reforms to the rate and threshold on their own, but they do estimate the combined impact with two other reforms: increasing the Employment Allowance from £5,000 to £10,000 and removing the Employment Allowance cap. We include these estimates for reference. HM Treasury’s static estimate of the combined policies is £122.3 billion over five years (our static estimate of just the threshold and rate changes is £147.0 billion). The OBR’s dynamic estimate of the combined policies is £79.9 billion, while our estimate of the reduced subset is £108.4 billion.

Note that we also use different assumptions about the incidence of the tax reform on employee wages. We assume that 40% of the incidence is born by wages in 2025, rising 10 percentage points per year before stabilising at 70% in 2028, while the OBR assumes that it flows 100% to real wages in the medium term. HMT does not specify its behavioural assumptions.

All figures in £ billions

All figures in £ billions

PolicyEngine estimates that the reforms to employer NI will reduce net income by between 0.1 and 0.6 percent among household income deciles, with the impact strongest for the upper middle of the distribution.

Decile impact

The reforms are projected to affect two thirds of people, and over 90% of the top three income deciles. 94% of the lowest income decile is unaffected by the tax reforms.

Winners and losers

PolicyEngine estimates no significant (<1%) change to before-housing-costs absolute poverty or income inequality.

nikhil woodruff
PolicyEngine's Co-founder and CTO

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