Legislated Increases in Employment Costs

The employer NICs contribution rate for the second band will rise from 13.8% to 15%, representing a 1.2 percentage point increase. Additionally, the threshold at which employers start paying NICs will be lowered from GBP 9,100 to GBP 5,000, expanding the portion of earnings subject to these contributions.

For an employee earning GBP 60,000 per year, the combined effect of the change in rate and threshold will result in an increase of GBP 1,225 in employer NICs contributions, representing a cost hike 2% of pay.

Employee contribution rates to NICs have remained untouched in 2025.

Increased Private Medical Insurance (PMI) Costs

There has been notable escalation in private medical insurance (PMI) costs over the years. The average increase in premium costs has been hovering between 15-25%.

Cost escalation is influenced by higher average claims, medical cost inflation and increased utilization of the private system as the NHS continues to be saturated.

Employer paid medical premiums are imputed as income in-kind and subject to personal income tax. As the imputed income on the premiums falls on the higher salary band, there would be an extra 1.2% employer NICs contribution on these premiums.

Employees are also affected by cost escalation in PMI plans that require employees to pay for all or part of their family members’ coverage.

“Payrolling” of Benefit-in-Kind Taxation

No tax withholding from the employee’s paycheck is currently required on the imputed premiums for personal income tax purposes. The full effect of taxation on the imputed premiums has historically been felt at the end of the tax year at the time of personal income tax declaration, when the tax is fully payable.

Beginning in April of 2026, the tax effect on health insurance and other benefits-in-kind will change as the UK tax authorities introduces mandatory “payrolling” meaning that personal income tax withholdings on the imputed premiums will start being applied. In 2026, employees will experience the payment due from the tax year ending, as well as the new withholdings going forward.

Salary Exchanges

To address the rising costs of NICs in 2025, UK employers could consider implementing salary exchange schemes.

Under this approach, employees voluntarily reduce their contractual salary (salary sacrifice) in return for non-cash benefits, such as enhanced pension contributions, bike-to-work schemes or electric vehicles of equivalent value.

This restructuring of compensation is tax-efficient for the employee and lowers the employer’s NICs liabilities, as NICs are calculated based on the reduced salary.

However, employers must ensure compliance with legal requirements, including the optional remuneration arrangement rules, and they must clearly communicate the potential impact to employees.

Impact on Companies

• Increased Employment Costs
• The new NICs employer contribution rates will lead to higher payroll costs.
• Escalating private medical costs will continue to add strain to benefit budgets.

• Higher Pay Levels – To retain and attract talent, companies may need to offer higher starting salaries and higher pay salary increases that mitigate the rising medical plan costs.

• Additional Employee Communication – Companies will need to intensify efforts to educate employees on judicious utilization of medical plans, wellness promotion and salary exchange programs.

Suggested Employer Action

• Update payroll budgets to reflect the higher employer NICs contributions and work with payroll managers to ensure compliance with the new contribution rates.

• Review their salary exchange programs or start one if they do not currently offer them, to help mitigate the rising cost of employer NICs contributions.

• Consider adopting front-end plan administration platforms that will enhance employee convenience, streamline plan administration and promote the use of salary exchange programs.

• Prepare for escalating private medical insurance premiums, work with brokers to negotiate the best possible rates for the desired coverage.

• Implement health assessments for early detection of medical conditions and introduce data-driven wellness programs to keep their workers healthy and productive.

If you have any questions, please contact your HUB Advisor. View more updates in our Global Benefits Directory.