Budget: further reduction to employee’s NIC confirmed

The Spring Budget confirmed the expected further two percentage point reduction to the main rate of employee’s class 1 NIC. This will drop from 10 percent to 8 percent, effective from 6 April 2024. From a payroll operation perspective, this puts pressure on payroll teams during their busiest period as they approach the tax year end. Most employers will have recent experience of introducing changes to tight timescales following the recent reduction in employee’s class 1 NIC from 6 January 2024, but this latest announcement gives employers just one month to make the relevant payroll system changes to calculate the new rate in readiness for the first payroll run in the new tax year. What should employers bear in mind? This article summarises the challenges and key learnings from the earlier rate reductions. 

The timing of the latest rate reduction announced at the Budget will present various challenges to employers – not least how the payroll software will be reconfigured, tested and delivered into a live payroll environment in a very demanding timescale. Rigorously test the changes to payroll by your provider to ensure the calculations are correct so that your payroll returns are compliant. 

It is important to note that this further NIC reduction is for employee’s NIC only and there is no reduction to the employer’s NIC liability. 

Early engagement with stakeholders is key, which will have been a process already undertaken for the NIC reduction from January 2024. Include your payroll team and software provider to develop a project plan and identify resource requirements. Timing is critical as the employee’s NIC reduction should be implemented for pay periods from April 2024.

Employee communication is always important for successful change management processes. This latest change in NIC rates is no different. For example, the first payslip issued to employees in April once the new rate is in force might trigger queries from employees whose net pay doesn’t reflect their expectations. You may wish to consider publishing examples to illustrate the impact or add narrative on the payslip where possible.

We have included an example of the expected employee’s NIC saving comparing the total employee NIC liability in 2023/24 vs the anticipated NIC liability at the reduced rate of 8 percent, based on a cross section of earnings levels:

Clearly, timescales and resources need careful thought as April is a particularly busy time for payroll teams who will be preparing the relevant tax year end processes in the payroll system and rolling systems forward ready for the new tax year.

Weekly payrolls have an extremely tight turnaround. These need very careful planning to demonstrate a commitment to employees that they are supported with the cost of living to ensure they receive the benefit of the reduced rate as quickly as possible.

As NIC is calculated on a pay period basis, capturing information from the business about payroll adjustments must be robust to ensure payments are subject to NIC at the correct rate at the correct time.

KPMG in the UK have a team of payroll consultants who bring a wealth of experience to the challenges of managing payroll software changes and mid-year implementations. If you have any queries or concerns or resource gaps, please do not hesitate to reach out to the authors of this article, or your usual KPMG in the UK contact.

For further information please contact:

• Caroline Laffey
• Natalie Shingler