91̽��

With Labour having pledged not to increase the ‘big three’ taxes in their ‘triple lock’ promise, they will undoubtedly be exploring alternative solutions. We look at some of the options that may be under consideration.

Time for bold moves?

There have been reports that an increase in employers’ National Insurance contributions (NICs) is being contemplated. That may prove tempting given the relative simplicity of the measure and the fact it is potentially lucrative for the Exchequer. A 1% increase in employers’ NIC rates from 13.8% to 14.8% is estimated by in additional revenue for the government in the 2025/26 tax year. A key challenge however is that it could still be indirectly seen as a tax on workers, which Labour pledged in its manifesto not to increase, and may stifle growth.

If that is too politically difficult, why not dust off some of the abolished Office of Tax Simplification’s previous ideas - perhaps a closer alignment of income tax and NICs? Although, merging them, which was also suggested, may be a step too far. The differences between these two taxes have been identified as major sources of complexity for businesses. The National Insurance Act of 1911 laid the foundation for the current NICs system, which has seen few fundamental changes since then. In 1975, NICs began to be calculated based on earnings, rather than a blanket flat rate, and collected via payroll and PAYE (80 years old this year!) so it could be argued that NICs are ripe for some modernisation.

Potential reforms

One proposed reform is to move NICs to an annual, cumulative, or aggregate basis, similar to income tax. This change, which has received broad support in the past, could simplify the system and make it more inclusive, though some individuals might end up paying more NICs as a result. This would address the current structure of NICs, which is seen as outdated for a modern, flexible workforce with multiple employments.

Basing employers’ NICs on total payroll costs could also make it simpler to understand and reduce distortions created by the current system. Perhaps even renaming employers’ NICs as a payroll tax is another suggestion.

Other areas that may be looked at include:

• Extending NICs to employer pension contributions or even pension payments themselves. 
• Aligning the NICs position for employed and self-employed individuals could ensure that everyone receives the same benefits from the system, regardless of the class of NICs they pay.
• Aligning the legislation so tax and NICs apply equally to pay and benefits, so the scopes of the charges or reliefs are the same. 
• Bringing taxable benefits in kind into Class 1 NICs and abolishing Class 1A NICs, with mandatory payrolling of benefits proposed from April 2026, would simplify payroll processes.

Of course, even if these are not on the cards, recent developments indicate that employers should prepare for potential increases in employee costs. The Low Pay Commission (LPC), an advisory body to the government on wage rates, has suggested that the National Living Wage (NLW) could be set at around £12.10 per hour or potentially higher in April 2025, up from the current £11.44 per hour. This suggestion aligns with directives from Deputy Prime Minister Angela Raynor and Business Secretary Jonathan Reynolds, who have urged the LPC to ensure the NLW reflects living costs and remains above two-thirds of median earnings.

Additionally, the government aims to phase out the 18–20-year-old rate, currently at £8.60, moving it towards the NLW. This initiative builds on what is seen as one of the last Labour government’s significant achievements.

In short, employers should prepare for employment costs to increase in various areas over the coming years. Employees, too, may not be exempt from these changes, as aligning NICs with income tax on benefits or requiring those over state pension age who currently do not pay NICs on employment income to contribute, could also be considered.