How to mitigate the impact of 2025 Employer National Insurance Contribution rises using Enterprise Management Incentives

The 2024 Budget brought unwelcome news for many businesses; a significant increase in Secondary Class 1 (Employer) National Insurance Contributions. This rise is expected to strain company finances and potentially impact hiring and growth. However, for savvy business owners, there may be a way to reduce some of this burden through using Enterprise Management Incentives (better known as EMI Options) to incentivise staff.

The Employer’s National Insurance Contribution increase and its impact

The 2024 Budget increased Employer’s National Insurance Contribution rates by 1.2% to 15% from April 2025.

At the same time, the threshold at which employers start paying Employer’s National Insurance Contributions for employees will reduce from £9,100 to £5,000, meaning employers will have to pay Employer’s National Insurance Contributions for more lower paid employees.

Whilst there are some limited changes aimed at mitigating the increase for smaller employers, most businesses will be liable to pay the higher Employer’s National Insurance Contributions meaning increased payroll costs, which could lead to reduced profitability, delayed or reduced hiring plans and a need to find cost-saving measures elsewhere in the business.

Understanding EMI Options

EMI Options are tax-advantaged share schemes designed to help small and medium-sized businesses attract and retain talented employees. They allow companies to grant an option to acquire shares in the business to key employees with significant tax benefits. Shares received under EMI Options can then be retained for long term growth, purchased back by the company, or be focused on taking part in a full exit.

How EMI Options can help mitigate the cost of increased Employer’s National Insurance Contributions

By implementing EMI Options, businesses can mitigate increased Employer’s National Insurance Contributions, and also receive a number of other valuable benefits.

Here’s how:

• Provided that the EMI Options are granted on the basis of the employee acquiring the shares at their market value on the date of grant, there should not be any Income Tax or National Insurance Contributions payable on the grant or exercise of the EMI Option, or on the sale of the shares.
• On the sale of the shares, any gain will be subject to Capital Gains Tax which is generally lower than rates of Income Tax, and does not have National Insurance Contributions applied.
• EMI Options align employees’ interests with those of the company by offering them a stake in its success.
• The tax advantages of EMI Options will also make them an attractive form of compensation to the employee with them potentially receiving a greater net benefit compared to traditional salary increases or bonuses, given the application of Capital Gains Taxes rather than Income Tax and National Insurance Contributions.
• By granting EMI Options instead of cash, companies can preserve cash flow, which is especially critical during periods of rising costs.

Conclusion

The Employer’s National Insurance Contribution increase presents a challenge for businesses, but it can be mitigated if business owners consider other ways of remunerating employees.

By using EMI Options, companies can mitigate Employer’s National Insurance Contribution liabilities, as well as receive a number of other benefits which leads to the conclusion that EMI Options will continue to be a popular tool for eligible businesses.