Compensating for the increase in employer National Insurance contributions – the clock is ticking from the Autumn Budget!

November 2024

Will Buckby, Ben Couldrey and Kevin Henderson

How will the changes to employer National Insurance contributions be treated under standard form construction and engineering contracts?

Introduction

We have recently received several queries from the market in relation to the increase in employer National Insurance contributions (“NIC”) announced in the Chancellor’s Autumn 2024 Budget speech on 30 October 2024.

The supply side of the industry (consultants, contractors and subcontractors alike) are all facing the prospect of the resulting increased staff costs so will naturally be concerned how these increased NIC costs will be treated in common standard form construction contracts (and what the procedure and timescales will be for successfully making a claim for any entitlement in respect of them).

Summary of the changes to NIC announced in the Autumn 2024 Budget

As a reminder, employers currently pay secondary class 1 NIC at the rate of 13.8% on an employee’s earnings above the threshold of £9,100 per year. This percentage is payable by employers, and not a contribution by way of deduction from their employees’ wages.

The Chancellor has announced that from 6 April 2025, employers will pay secondary class 1 NIC at a new rate of 15%, and the £9,100 per year threshold will be lowered to £5,000 per year. Therefore, in addition to a 1.2% increase in the percentage amount employers will be required to pay for the NIC, that increase will apply to a greater proportion of their employees’ earnings.

There is a potential olive branch:

For those eligible to claim the Employment Allowance (essentially an Employers National Insurance rebate) the relief is planned to more than double from the current rate of £5,000 to £10,500.
Further, the previous eligibility requirement of businesses needing to have paid total NICs of less than £100,000 in the previous year is also being removed, which means most employers will now be able to claim the Employment Allowance. This will be in addition to the current Small Employer’s Relief, which is a scheme that allows qualifying small businesses to claim 100% plus an additional 3% of their employees’ statutory maternity, paternity, adoption, parental bereavement, and shared parental pay.

However, given the average reported UK construction salaries, it is likely that most if not all supply-side employers in the sector will inevitably face an increase in staff costs as a result of the NIC increase. The question which naturally arises is: are the increased staff costs caused by the NIC increase recoverable under common standard form construction contracts and, if so, in what circumstances?

The full answer to that question will always depend on the applicable terms of the relevant contract (and specifically how the standard form terms have been amended, as they frequently are). However, for the purposes of this article, we discuss some initial considerations and principles from example provisions in two of the most common standard form contract suites: the JCT and NEC4.

An important detail to remember about when the NIC increase becomes law (and will apply)

Resolutions and other content of a Budget Day speech become law either:

(i) through the passing into law of the relevant Financial Bill (for the Autumn Budget 2024 this will be the Finance Bill 2025);
(ii) the passing of other legislation; or
(iii) the Chairman of Ways and Means tabling a motion for the provisional collection of taxes which allows changes to existing taxes to come into effect from Budget Day (or shortly afterwards) despite the relevant Finance Bill not having completed its parliamentary journey (under Section 1 of the Provisional Collection of Taxes Act 1968). Typically, these changes include alterations to the rates of duty on fuel, alcohol, and tobacco.

In respect of NIC, it is likely that (ii) above will apply (probably in the form of an amendment to the Social Security Contributions and Benefits Act 1992 and/or the Social Security Administration Act 1992, and the Social Security (Contributions) Regulations 2001).

However, in any event, the relevant change in law will take effect from 6 April 2025 (not before) so this will delay the implementation or realisation of any relevant contractual compensation mechanism. This is the case even if there is an obligation on the consultant, contractor or subcontractor (as the case may be) to make a timely notification under the contract at this point in time (see more on this below under the heading ‘A reminder: compensation event notification procedure and timescales under the NEC’).

JCT

The JCT suite contains optional provisions for ‘fluctuations’ to apply. A ‘fluctuations’ clause is a contractual provision enabling the adjustment of the contract price / sum to account for various aspects that can cause prices to change including changes in law and/or other (usually inflationary) changes in material costs and/or labour expenses during the contract period.

If a JCT Fluctuation Option is stated to apply in the relevant JCT (depending on the Option chosen) this may provide for an increase to the Contract Sum based on an increase to NICs after the Base Date.

However, assuming no Fluctuation Option applies, the JCT Design & Build Contract (“D&B”) 2016 provisions may not allow for any increase to the Contract Sum and/or reimbursement of loss and/or expense in respect of the increase to NICs. This is because:

Clause 2.15.2 (post-Base Date change to Statutory Requirements leading to a “Change”) would likely not be engaged because the change to the Statutory Requirements would not “necessitate an alteration or modification to the Works”.
The same principle applies to the JCT D&B 2016 Subcontract (see clause 2.12.2.1).
This is unchanged in the recently released JCT D&B 2024 and JCT D&B Sub-Contract 2024.
Furthermore, although there is a Relevant Event in the JCT D&B 2016 for the purposes of an extension of time (at clause 2.26.12) for a post-Base Date exercise by the UK government of any statutory power which “directly affects the execution of the Works”, there is no equivalent Relevant Matter (at clause 4.21) for the purposes of reimbursement of loss and/or expense.
The same is true in the JCT D&B 2016 Subcontract (see clause 2.19.15).
However, in the JCT D&B 2024 suite, the D&B main contract has been updated to include a wider Relevant Event in respect of post-Base Date legislative, statutory power and guidance changes (see clause 2.26.8) and the reference to “directly” has been removed to allow any occurrence which simply “affects the execution of the Works”, and the same is true in the D&B Subcontract (see clause 2.19.11).
Whilst this update is helpful, an extension of time in respect of increased NICs will be of little relief or relevance to Contractors and Subcontractors (who will each be concerned with the financial implications of the increased NICs – there will likely be no time impact of the increase).

However, the JCT D&B 2024 has added a new optional Relevant Matter at clause 4.21.7 that could allow the Contractor to apply for loss and/or expense in respect of a post-Base Date legislative, statutory power and guidance change. The same is true in respect of the JCT D&B 2024 Subcontract (see clause 4.16.10) for the Relevant Sub-Contract Matter for Subcontractors. That said, neither is a default position under the JCT 2024 – in each case the relevant provision will only apply if the parties select it to apply in the relevant Contract / Sub-Contract Particulars.

Potential obstacles to entitlement (where it in principle applies)

As noted above (see ‘An important detail to remember about when the NIC increase becomes law (and will apply)’), the increase in NIC will not be effective until 6 April 2025 (even where the relevant contract was a JCT D&B (Contract or Sub-Contract) 2024 with the optional Relevant (Sub-Contract) Matter selected to apply). As a result, the Contractor or Sub-Contractor (as the case may be) would not be able to benefit from the (Sub-Contract) Matter at this time, and, in any event, not until on or after 6 April 2025.

The Contractor / Sub-Contractor may also face the argument under the JCT suite that the NIC increase will not affect the execution of the Works or Sub-Contract Works (as the case may be) because the NIC increase is payable by them (as employers) in any event (even where their respective staff are not engaged on any project). This is because it is referrable to an employee’s salary (whether that employee is engaged is productive work or not), which is a constant business overhead that is not linked to or dependent on the employee being engaged on the Works or Sub-Contract Works.

Always consider the schedule of amendments

The above considers the position of the JCT contracts in their unamended form. However, the JCT suite is only very rarely left unamended, and we are aware that changes in law are amongst the frequent issues regularly negotiated in practice.

For example, many readers will be familiar with a quite common amendment that entitlements for a change in law (or the ‘Statutory Requirements’ in JCT language) are usually made conditional upon such change not being foreseeable at the date of entry of the contract (the ‘Base Date’ in JCT language).

As a result, where a change in law was foreseeable at the date of entry of the relevant contract, the amended provisions will usually prevent any entitlement to time and/or money arising. It is likely that employers / clients will seek to amend the optional additional Relevant (Sub-Contract) Matter in the JCT 2024 suite so to only apply to unforeseeable changes in law.

It is therefore important for all Contractors and Sub-Contractors currently engaged under amended JCT forms to check the applicable schedule of amendments.

NEC4

Turning to the NEC4 suite, Secondary Option X2 can be selected to apply to give the Consultant (for example, in the PSC) and the Contractor (for example, in the ECC) the right to a compensation event upon the occurrence of a change in law after the Contract Date.

However, parties familiar with the NEC4 suite of contracts will be aware of the prescriptive early warning and compensation event notice requirements.

For example, under the ECC, the Contractor is required to give an early warning to notify an increase to the total of the Prices (including an increase to the Contractor’s total cost), and the Project Manager enters the matter into the Early Warning Register (see clause 15.1 of the ECC).
Notwithstanding that the NIC increase will not be effective until 6 April 2025, Contractors currently engaged under an ECC with Option X2 selected should be considering giving the relevant notice of the 6 April 2025 change so it may be entered into the Early Warning Register.

As with the JCT, the ECC is seldom left in its unamended form, however. The NEC Secondary Options that grant compensation events are not always easy to agree to be included in the contract (and this includes Option X2). It is therefore important that for live ECCs, Part 1 of the Contract Data is checked to see if Option X2 applies and/or if there have been amendments to:

the compensation events in Clause 60 (such as any additions or deletions that would impact the ability for a change in law to be a compensation event (including in respect of foreseeability as noted above)); and/or
the content of the Schedule of Cost Components / Shorter Schedule of Cost Components.

A reminder: compensation event notification procedure and timescales under the NEC

What remedies will be available through the NEC compensation event regime depends on:

the applicable NEC Main (Pricing) Option (as this impacts the assessment of the compensation event’s impact on Defined Cost);
(as noted above) whether or not Secondary Option X2 is stated to apply; and
(as with the JCT) whether any bespoke amendments have been made to the standard NEC positions.

Using the example of a Consultant under an NEC PSC (with Option X2 stated to apply):

Clause 61.3 (in both the NEC3 and NEC4 PSC) requires the Consultant to notify the Service Manager of an event which has happened, or which is expected to happen, and the Consultant considers is a compensation event.
If the Consultant does not notify within eight weeks of becoming aware that the event “has happened”, the Prices etc. will not change. However, note: the NEC3 PSC is slightly wider than the NEC4 PSC in that it requires notification of the event within eight weeks of the Consultant only becoming aware of an event (not necessarily of the event having “happened”).
If the Consultant delays notification of the event until relevant NIC legislation is passed (receives Royal Assent), there is a risk that the Consultant could be time barred from an increase to the Prices, etc. This is because (as noted above) the Consultant is aware of the impending change in law and has been since the Budget Day speech on the 30 October 2024.
It is therefore very arguable that we are currently in the third week of the required notification period under PSC clause 61.3.
The clock is therefore ticking to ensure notification is made in time (notwithstanding that the compensation event’s impact on Defined Cost will not be felt / effective until 6 April 2025).

The same notification procedures (and time bar) will equally apply to a Contractor under an ECC.

Conclusion

For future projects and contracts, the risk of the NIC increase should be carefully considered and factored into the contractual and commercial terms being negotiated by the parties.

As a general comment, it is worth noting that the NIC increase is a change that will impact all project parties, and therefore employers (at all levels) should not be surprised if their supply chains seek to request meetings to discuss the impact on their fee quotes with a view of seeking side letter agreements / deeds of variation to amend the rates or sums outside of the existing contract mechanisms.

How these negotiations are dealt with will vary but the provisions of the existing contract, sub-contract or appointment (as the case may be) should be fully reviewed and understood by the parties prior to agreeing any entitlements or variations to the existing terms.

Should you have any questions on the content of this article or wish to discuss the application of some of these principles to your construction contracts or professional appointments, then please contact the authors.

Download PDF