CPP Contribution Changes 2024-25: Impact On Small Business Payroll Costs

NOTE: This blog uses specific CPP terminology and discusses the new structure of Canada Pension Plan contributions. For a better understanding, explanations of terms are provided throughout the blog where they first appear.

CPP Enhancements in 2024 & 2025: Prepare for Rising Payroll Costs

CPP contribution rates are increasing in 2024 & 2025, affecting small business payroll costs across Canada. These CPP changes were designed to improve retirement benefits for workers but will significantly impact employer payroll expenses especially for incorporated businesses and sole proprietors.

Changes in 2024: (See charts below for financial impact.)

• The TIER 01/YMPE will increase from $66,600 to $68,500.
  • YMPE = Year’s Maximum Pensionable Earnings – this is the maximum income level up to which CPP contributions are applied in this tier. Earnings above this level do not have Tier 01 CPP Contribution Rates.
• The TIER 02/YAMPE was introduced at $73,200, creating a second contribution threshold for higher earners.
  • YAMPE = Year’s ADDITIONAL Maximum Pensionable Earnings – a new threshold introduced for higher-income earners. It represents the additional income above the TIER 01/YMPE. Tier 02 CPP Contribution Rates apply.
  • TIER 02/Contribution Rate is 4% on the income between TIER 01/YMPE & TIER 02/YAMPE

Changes in 2025: (See charts below for financial impact.)

• The TIER 01/YMPE increases to from $68,500 to $69,700
• The TIER 01/ Contribution Rate increases from 5.95% to 6.95%.
• The TIER 02/YAMPE increases from $73,200 to $79,400, further raising contributions for higher earners.

It’s important for incorporated businesses and sole proprietors (self employed) to understand how these changes affect CPP contributions and plan their payroll and budgets accordingly.

Key Takeaways

• 2024 Changes:
  • Introduction of TIER 02: The introduction of TIER 02 adds a 4% contribution rate on income between the TIER 01/YMPE ($68,500) and TIER 02/YAMPE ($73,200) thresholds.
• 2025 Changes:
  • Increased Contribution Rates: The TIER 01/ YMPE increases to $69,700, and the TIER 01 Contribution Rate increases from 5.95% to 6.95%.
  • TIER 02/YAMPE Increase: The TIER 02/YAMPE increases to $79,400 and maintains a 4% contribution rate on income between the new thresholds.

These changes will lead to higher payroll costs for businesses, particularly for those with higher-paid employees or significant earnings.

CPP Contribution Rate Changes For Incorporated Businesses In 2024 & 2025

If you own an incorporated business, these changes will increase your payroll expenses over the next two years. Below is the employer a breakdown of the year-by-year changes for an employee earning $80,000:

*TIER 01 / YMPE: Year’s Maximum Pensionable Earnings for Tier 01
**TIER 02 / YAMPE: Year’s Additional Maximum Pensionable Earnings for Tier 02

NOTE: The $3,500 exemption means that CPP contributions are not charged on the first $3,500 of income earned. This exemption applies only for the Tier 01 earnings (up to the YMPE). It does not apply to Tier 2 earnings.

Calculations:

2023: Total: $3,754.45

• TIER 01 – (66,600-3,500) X 5.95% = 3,754.45

2024: Total: $4,055.50 (3,867.50 + 188)

• TIER 01 – (68,500 – 3,500) x 5.95% = 3,867.50
• TIER 02 – (73,200 – 68,500) x 4% = 188

2025: Total: $4,255.50 (3,867.50 + 388)

• TIER 01 – (69,700 – 3,500) x 6.95% = 4,600.90
• TIER 02 – (79,400 – 69,700) x 4% = 388

Key Takeaways:

• The total CPP payroll expense for an employer increases from $3,754.45 in 2023 to $4,988.90 in 2025, an increase of $1,234.45.
• The rising costs emphasize the need for employers to plan ahead to manage payroll budgets effectively.

CPP Contributions for Sole Proprietors:

Double the Cost – What to Expect in 2024 & 2025

Sole proprietors face a larger financial burden compared to incorporated businesses because they pay both the employer and employee portions of CPP contributions. As CPP enhancements continue to be phased in, sole proprietors’ contribution rates will rise sharply, particularly for those earning above the YMPE.

Below is the breakdown of the year-by-year changes for a sole proprietor earning $80,000:

*TIER 01 / YMPE: Year’s Maximum Pensionable Earnings for Tier 01
**TIER 02 / YAMPE: Year’s Additional Maximum Pensionable Earnings for Tier 02

NOTE: Sole proprietors (self employed) must pay both the employer and employee portions of CPP, making their total contribution rates significantly higher than incorporated businesses that split the burden with employees.

Calculations:

2023: Total: $7,508.90

• TIER 01 – (66,600 – 3,500) X (5.95% + 5.95%) = 7,508.90

2024: Total: $8,111.00 (7,735+ 376)

• TIER 01 – (68,500 – 3,500) x (5.95% + 5.95%) = 7,735.00
• TIER 02 – (73,200 – 68,500) x 8% = 376

2025: Total: $9,977.80 (9,201.80 + 776)

• TIER 01 – (69,700 – 3,500) x (6.95% + 6.95%) = 9,201.80
• TIER 02 – (79,400 – 69,700) x 8% = 776.00

Key Takeaways

• From 2023 to 2025, sole proprietors’ total CPP contribution will increase by $2,468.90.
• The largest increase occurs in 2025, when the TIER 01/Contribution Rate increases to 13.90%, and additional contributions apply to income between TIER 01/YMPE and TIER 02/ YAMPE at 8%.

Conclusion:

Both incorporated businesses and sole proprietors (self employed) must plan for the rising costs of CPP contributions due to the upcoming enhancements. Proper planning now can ensure smoother transitions as CPP contribution rates increase in the coming years.

Key CPP Terminology & The New Contribution Structure Explained

CPP Terminology

Year’s Maximum Pensionable Earnings (YMPE)

• YMPE is the maximum income level up to which CPP contributions are applied for Tier 01
• The YMPE changes annually, In 2024, the YMPE is set at $68,500 and is increasing to $69,700 in 2025.

Year’s Additional Maximum Pensionable Earnings (YAMPE)

• YAMPE refers to the maximum income level for Tier 02, applying to higher-income earners
• In 2024, YAMPE is $73,200, increasing to $79,400 in 2025

Contribution Rates (TIER 01 / CONTRIBUTION RATE, TIER 02 / CONTRIBUTION RATE)

• These rates represent the percentage applied to eligible earnings to calculate CPP contributions.
• For 2024, the TIER 01 Contribution Rate is 5.95%, rising to 6.95% in 2025. The TIER 02 Contribution Rate remains at 4% for both years.

Sole Proprietor Contribution Rate

• Sole proprietors pay both the employer and employee portions of CPP, leading to higher rates.
• In 2024, this combined rate is 11.90% for TIER 01, rising to 13.90% in 2025. For TIER 02, the rate remains at 8%.

Exemption

• There’s a $3,500 exemption that applies to TIER 01 earnings – meaning CPP contributions are not charged on the first $3,500 of income.
• This exemption does not apply to TIER 02 earnings.

New Canada Pension Plan Contribution Structure

For more information, visit the CRA’s webpage on the CPP Enhancement