Navigating Increased National Insurance Contributions (NICs) and Rising Operating Costs

Big changes are coming for employers, and charities are not exempt. Last year, the UK government announced an increase in Employer National Insurance Contributions (NICs) from 13.8% to 15% starting April 2025.

This increase means higher payroll costs for charities, impacting budgets and financial planning. Alongside this, the secondary threshold for NICs is being reduced from £9,100 to £5,000, meaning more employees will now be liable for NICs.

While the Employment Allowance is rising to £10,500, offering some relief, charities must evaluate whether this adjustment will adequately offset their increased payroll costs.

For many organisations, staff wages represent the largest expense. Even a marginal increase in NICs could have substantial implications for hiring decisions, payroll budgets, and service provision.

With already stretched budgets, these changes demand immediate attention from charity trustees. What does this mean for your charity’s financial sustainability? How will it impact staffing and service delivery? What measures can you take to soften the blow? Now is the time to assess the implications and take action.

1. Financial Impact: Understanding the Cost to Your Charity

The NIC rise will increase employment costs for all charities, particularly those with larger payrolls. According to NCVO, charities are already facing financial pressures, and this additional cost may force some to cut jobs or reduce services.

Payroll Impact

The rise in employer NICs will increase costs per employee, particularly for charities with full-time staff. A charity with 20 employees earning an average salary of £30,000 could see a significant annual increase in payroll costs.

This also means that charities with a large number of staff on minimum or modest wages will bear a disproportionate burden, as they will now face higher deductions on more employees.

As payroll expenses increase, you may need to re-evaluate salary bands, benefits, and hiring strategies to keep costs manageable.

Threshold Changes

Lowering the secondary threshold means more employees will incur NIC costs, further increasing the financial burden.

Previously, charities that had some employees earning below the NIC threshold were able to keep payroll expenses lower. With the new changes, staff who were not previously contributing to NICs will now be subject to deductions, affecting net take-home pay.

This could lead to dissatisfaction among staff and potential challenges with staff retention, particularly in charities where wage growth has already been limited due to budget constraints.

Employment Allowance Boost

While an increase to £10,500 will help small charities, it may not fully counterbalance the additional NIC burden for larger organisations, especially those with a payroll exceeding the eligibility limits for Employment Allowance.

Many charities with higher payrolls will receive no additional benefit from this allowance. For instance, a charity employing 50 staff may see an increase in NICs of more than £30,000 annually, with only a £10,500 reduction, leaving them with a significant gap to cover through other means.

Public vs. Charity Sector Disparity

Unlike public sector organisations, which will receive government support to absorb these costs, UK Fundraising highlights that charities are expected to cover these increases without additional funding.

This places charities at a disadvantage, as they are often delivering essential public services but without the same financial safety nets.

Without intervention, the gap between public sector financial resilience and the charitable sector’s struggles could widen significantly, threatening the sustainability of many organisations.

2. Strategic Considerations for Trustees

Given the weight of these new costs, it is crucial for trustees to think strategically about how to adapt. Below are potential avenues to explore:

Rethinking Recruitment and Contracts

If you have been planning to expand your team, now is the time to carefully evaluate how the higher NICs will affect your overall budget.

Would restructuring existing roles reduce the additional burden? Might part-time or freelance positions be a more viable solution than more full-time hires?

By experimenting with different contract arrangements, you could keep your payroll expenses more manageable and still meet your organisation’s needs.

Maximising Volunteer Involvement

Are there roles within your charity that do not strictly require a paid member of staff? If so, transitioning certain responsibilities to volunteers could help you absorb rising employment costs.

To ensure volunteers are effective, you may need to invest in better recruitment, training, and support processes. This strategy allows you to focus paid staff on specialised or mission-critical areas while volunteers handle more general tasks.

Fundraising with a Financial Reality Check

It is wise to incorporate NIC increases into your communications with funders and donors. Being transparent about the escalating employment costs shows stakeholders how vital extra funding has become.

You might make a compelling case by explaining how securing additional donations or grants will keep critical programs alive, even as payroll expenses climb. Funders typically appreciate clarity regarding where their money will be spent.

Balancing Service Delivery with Financial Sustainability

As a trustee, you cannot afford to ignore core costs, but you should also guard against compromising your mission. Finding the right balance between cost-cutting and service excellence is delicate.

You could look into streamlining administrative overheads, negotiating more favourable deals with suppliers, and leveraging digital tools to boost efficiency. Each cost-saving measure you take – no matter how small – could help protect your essential programs and services..

3. Payroll, Compliance, and Reporting – What Trustees Need to Check

The NIC changes come with compliance and reporting requirements that charity trustees must be aware of.

Payroll Systems Need Updating

Ensure your payroll provider or in-house system is prepared for the changes to NIC rates and thresholds. This means reviewing payroll software, ensuring accurate calculation of NIC contributions, and training finance teams on updated procedures. In some cases, switching to a more advanced payroll system with automated compliance checks might be beneficial.

Financial Forecasting Adjustments

The additional NIC costs must be factored into future budgets and financial plans. Scenario modelling can help you understand how different salary levels will be impacted. Forecasting tools and professional accounting software can also assist charities in preparing for best- and worst-case financial scenarios. Reassess financial reserves and ensure you have contingency funding to mitigate unexpected payroll increases.

Annual Accounts and Reporting

The increase in employment costs will have implications for financial transparency, making accurate reporting essential. Auditors may scrutinise how charities adapt to these changes in their financial statements.

Working closely with a finance team can help you ensure compliance with regulatory requirements, particularly when presenting financial reports to funders and stakeholders.

Seek HMRC guidance, sector updates, and expert financial advice. Sector bodies such as NCVO and the Charity Finance Group regularly publish resources to help charities navigate financial compliance changes.

Timely Payroll Processing

Increased NICs may lead to more complex payroll calculations and potential errors if finance teams are not adequately prepared. Ensure payroll staff are well-trained, and that your organisation meets all deadlines for tax and NIC submissions to avoid penalties.