Should charities be exempt from the employer NIC increase?

The debate in brief

In the Autumn Budget of October 2024, the Chancellor announced an increase in employer National Insurance Contributions from 13.8% to 15% and a reduction in the secondary threshold from £9,100 to £5,000. The public sector was compensated through additional departmental funding — worth an estimated £4.7–5.1 billion a year — but charities and the wider voluntary sector were explicitly excluded from that compensation. The private sector can, in theory, pass costs through to consumers via higher prices. Charities can do neither. NCVO estimated the cost to the sector at £1.4 billion per year, a figure later adopted by ACEVO and the Charity Finance Group as the sector's shared estimate — equivalent to roughly 2% of total sector spending. There was no exemption, no transitional relief, and no compensation.

The sector mounted its most coordinated fiscal campaign in years, but the government held firm. The debate now centres on whether the sector can absorb the cost without cutting services, and what the long-term consequences will be for charities that deliver public services on thin or negative margins.

Quick takeaways

The arguments

The case for a charity exemption

Charities occupy a unique position in the economy. They are not public sector bodies, so they do not receive departmental funding uplifts. They are not private businesses, so they cannot raise prices to cover increased costs. When employment costs rise, the only options available to charities are to cut services, reduce headcount, draw down reserves, or cross-subsidise from unrestricted fundraised income — all of which weaken the organisations and harm beneficiaries.

The argument for exemption rests on a straightforward principle: charities deliver public benefit, often under contract to government, and should not be treated less favourably than the public sector when the government increases employment taxes. NCVO's own modelling put the combined cost to the sector at £1.4 billion a year, and separate analysis by the Nuffield Trust found that the NIC increase alone would cost England's independent adult social care providers around £940 million in 2025-26. Hospice UK has highlighted the hospice sector's pre-existing £77 million collective funding deficit, a structural gap that the NIC increase adds further pressure to. The sector employs roughly one million people. A 1.2 percentage point NIC increase plus a lower threshold is not a marginal cost — it is a structural shift in operating economics.

The precedent already exists. The government exempted the public sector from bearing the NIC cost. The logic for extending that to charities delivering public services on government contracts is not complicated: if the government would have to pay the NIC increase were it delivering those services itself, it should fund the increase when charities deliver them instead.

The case against a special exemption

The counterargument is that charities are employers like any other, and carving out sectoral exemptions from tax policy creates complexity, distortions, and precedent problems. If charities are exempt, what about social enterprises? Community interest companies? Small businesses that also cannot pass costs to consumers?

HM Treasury's position was that the Employment Allowance increase — from £5,000 to £10,500 — specifically targeted smaller employers across all sectors, and that charities would benefit from this alongside other small organisations. The government also pointed to the broader fiscal context: the NIC increase was projected to raise £23.8 billion in 2025-26, rising to £25.7 billion a year by 2029-30 (before behavioural effects), and exempting any sector would reduce that yield and require compensating cuts or taxes elsewhere.

There is also a harder argument, less publicly stated: that the sector's reliance on below-market wages and thin margins is itself a structural problem, and that an external cost shock — however unwelcome — forces a necessary reckoning with the true cost of delivering services. If charities cannot absorb a 1.2 percentage point increase without cutting services, the underlying funding model was already unsustainable.

The case for contract-level relief rather than blanket exemption

A middle position focuses not on a sectoral tax exemption but on the government funding the increased cost within its own contracts. Where charities deliver services under government contract — social care, probation, health, housing support — the contract price should be uprated to reflect the NIC increase, just as departmental budgets were. This avoids the complexity of a tax exemption while addressing the most acute harm: charities cross-subsidising government-commissioned services from charitable income.

The Charity Finance Group and NCVO both made this argument, noting that many government contracts already fail to cover full costs. The NIC increase compounds an existing full-cost-recovery problem rather than creating an entirely new one. Contract uprating would not help charities that are not government contractors, but it would protect the services most directly affected.

The evidence

NCVO published modelling in late 2024 estimating the cost of the employer NIC increase to the voluntary sector at £1.4 billion per year. This figure was widely adopted by ACEVO and the Charity Finance Group as the sector's consensus estimate. It is equivalent to roughly 2% of the sector's total income of £69.1 billion (NCVO Almanac, 2024).

The impact is not evenly distributed. Labour-intensive subsectors bear a disproportionate burden. Hospice UK has highlighted that the hospice sector was already facing a collective £77 million funding deficit before the NIC increase added further cost pressure; children's hospices specifically face an additional £5 million a year in NIC costs, according to Together for Short Lives. The National Care Forum warned that social care charities operating on tight local authority contract margins would struggle to absorb the increase without cutting care hours or closing services — separate analysis by the Nuffield Trust put the cost to England's independent adult social care providers at around £940 million in 2025-26. The National Housing Federation warned that the increase risked cancelling out this year's rent-increase income for many housing associations, with some larger providers reporting additional costs running into the millions of pounds a year.

The Employment Allowance increase to £10,500 — alongside the removal of the previous £100,000 eligibility cap, which means larger employers can now claim it for the first time — provides relief to the smallest employers: the government estimated that around 865,000 employers would pay no employer NICs at all as a result. However, the charity sector's employment is concentrated in medium and large organisations: NCVO data shows that charities with an income over £10 million — under 1% of all registered charities — account for around 57% of the sector's total spending. For these organisations, the Employment Allowance offset is negligible.

A Charity Finance Group survey in November 2024 found that 87% of responding charities were concerned about their ability to afford the increased NIC costs, 80% were exploring ways to offset the increase — including freezing recruitment and reducing headcount — and 61% said it was likely or very likely they would reduce staff numbers through non-renewal of contracts or redundancy. These figures reflect concerns and intentions rather than confirmed outcomes, but they indicate the scale of the sector's alarm.

Current context

The employer NIC increase took effect in April 2025. The immediate impact has been most visible in hospices and social care, where several organisations publicly attributed service reductions or financial distress to the increased employment costs. The government announced a £100 million capital funding package for hospices in December 2024 (covering 2024-25 and 2025-26), alongside £26 million in revenue funding for children's hospices, but this was explicitly capital funding rather than compensation for the ongoing NIC cost, and was widely characterised as welcome but insufficient to address the sector's structural funding pressures.

NCVO and ACEVO continued to press for either a sectoral exemption or contract-level compensation through 2025 and into 2026, but no policy change has been forthcoming. The Charity Finance Group has focused on practical guidance for members on managing the cost increase, including workforce planning, pay structure reviews, and scenario modelling.

The broader context matters. The NIC increase landed on a sector already dealing with rising demand, stagnant grant values, and government contracts that have not been uprated for inflation in real terms for years. For many charities, the NIC cost is not an isolated shock but the latest in a cumulative squeeze on operating margins that has been building since 2010.

Last updated: July 2026

What this means for charities

The practical implications depend on your funding mix. Charities that are primarily government-contracted and labour-intensive face the most acute pressure, because contract values do not automatically adjust and there is no mechanism to pass the cost through. If your organisation delivers social care, health services, criminal justice, or housing support under government contract, the NIC increase is an unfunded cost that must come from somewhere.

For charities funded primarily through grants and donations, the impact depends on whether funders are willing to increase awards to reflect higher employment costs. The Association of Charitable Foundations has pointed to real-terms growth in grantmaking in recent years, but has also been clear that funder flexibility alone "cannot fill the gaps created by government policy" — meaning the picture for grant-funded charities remains uneven at best.

All charities should be modelling the full-year impact on their staffing budgets, including the lower secondary threshold, which increases NIC liability for every employee earning above £5,000. The Employment Allowance increase provides full relief only for organisations with total employer NIC liabilities below £10,500; larger organisations can now claim the same flat £10,500 (following the removal of the previous £100,000 eligibility cap), but it covers only a small share of their total increase. For larger employers, the net cost is straightforward to calculate: 1.2% of gross pay above the new threshold for every employee.

Boards should also consider the workforce implications. A sector-wide survey by the Charity Finance Group found that over half of responding organisations were considering changes to recruitment plans, pay progression, or terms and conditions. The risk is that the NIC increase accelerates the existing trend of the charity sector falling further behind on pay, making recruitment and retention harder in precisely the roles — care workers, support staff, frontline practitioners — where demand is highest.

Common questions

How much does the employer NIC increase cost charities?

An estimated £1.4 billion per year across the voluntary sector, based on NCVO modelling published in late 2024. This figure was adopted as the sector consensus by ACEVO and the Charity Finance Group as well. The cost falls disproportionately on labour-intensive organisations such as hospices, social care providers, and housing associations.

Why were charities not exempt like the public sector?

The public sector was not technically "exempt" — government departments received additional funding through departmental budgets to cover the increased NIC cost. The government did not extend equivalent funding to charities, despite the sector's argument that charities delivering public services under contract should be treated comparably. HM Treasury's position was that the Employment Allowance increase and the broader public spending settlement addressed the concern sufficiently.

Does the Employment Allowance increase help?

It helps, but mainly the smallest employers. The Employment Allowance rose from £5,000 to £10,500 in April 2025, and the government also removed the previous £100,000 cap on eligibility, meaning larger charities can now claim the allowance for the first time. In practice, this offsets the NIC increase in full only for organisations with total employer NIC bills below the new threshold. For larger organisations, the same flat £10,500 is available, but it covers only a small fraction of a much bigger total increase. Since the majority of the charity sector's workforce is employed by medium and large organisations, the Employment Allowance provides only modest relief for most of the sector's employment costs.

Which charities are hardest hit?

Charities that are labour-intensive and operate on fixed-price government contracts face the greatest pressure. Hospices, social care providers, housing associations, and organisations delivering criminal justice or health services under contract are most exposed. These organisations cannot raise prices, cannot easily reduce staffing without cutting services, and often already operate on very tight margins.

What did the sector campaign for?

NCVO, ACEVO, the Charity Finance Group, and others ran a coordinated campaign calling for either a full exemption from the employer NIC increase for charities or, failing that, for government to fund the increased cost within its existing contracts with the sector. The campaign included an open letter to the Chancellor signed by more than 7,300 charity leaders, but did not result in a policy change. Some campaigners also called for a broader review of how employment tax changes affect the voluntary sector.

Can charities claim the NIC increase back through contracts?

Not automatically. Government contracts do not typically include inflation-adjustment clauses, and there is no mechanism for retrospective uprating to reflect the NIC increase. Charities would need to negotiate contract variations with individual commissioners — a process that is resource-intensive and offers no guarantee of success. The Charity Finance Group has published guidance on approaching contract renegotiation, but the structural problem remains: the cost increase is permanent and the funding is not.

Key sources and further reading

• Employer National Insurance Contributions (NICs) and the voluntary sector: impact and methodology — NCVO, November 2024. The methodology paper behind the £1.4 billion sector-wide cost estimate that underpinned the sector's campaign.

• Open letter to the Chancellor on employer NIC — NCVO and ACEVO, November 2024, signed by more than 7,300 charity leaders. The sector's coordinated response to the Autumn Budget announcement, setting out the case for exemption or compensation.

• Hospice sector facing collective deficit of £77m — Hospice UK. Analysis of the hospice sector's pre-existing collective funding deficit, which the employer NIC increase adds further pressure to.

• National Insurance rise will cost children's hospices an extra £5 million per year — Together for Short Lives. Analysis of the specific NIC cost impact on children's hospice charities.

• Social care providers at risk of collapse as analysis reveals cost to sector of employer National Insurance hike — Nuffield Trust. Analysis estimating the cost of the NIC increase to England's independent adult social care providers at around £940 million in 2025-26.

• National Insurance increase to cancel out rent-rise income for many housing associations — National Housing Federation / Social Housing, 2024. Analysis of the NIC increase's impact on housing association finances, including provider-level cost estimates.

• NCVO UK Civil Society Almanac 2024 — NCVO, 2024. Baseline data on sector income, employment, and expenditure against which the NIC cost is measured.

• Changes to the Class 1 National Insurance Contributions Secondary Threshold, the Secondary Class 1 NICs rate, and the Employment Allowance from 6 April 2025 — HMRC/HM Treasury, 2024. Details of the increase from £5,000 to £10,500, the removal of the £100,000 eligibility cap, and other eligibility criteria.

• Autumn Budget 2024: Policy Costings — HM Treasury, October 2024. The government's own costing of the employer NIC increase, projected to raise £23.8 billion in 2025-26, rising to £25.7 billion a year by 2029-30 (before behavioural effects).

• CFG survey reveals deep concern over rise in ERNICs — Charity Finance Group, November 2024. Survey findings on charities' concerns and planned responses to the employer NIC increase.

• An overview of the changes to employer National Insurance contributions and employment allowance — Charity Finance Group. Practical guidance on workforce planning, scenario modelling, and contract renegotiation.