At a glance
- Employer NI and National Minimum Wage increases contributing to a rising costs crisis.
- Small businesses are increasingly struggling to make ends meet.
- Accountants can help clients explore mitigating strategies like salary sacrifice and digital transformation.
The latest data from the Office for National Statistics (ONS) reveals a significant uptick in staffing costs, with 36% of firms (10+ employees) reporting increases. This trend is expected to continue as 67% anticipate further rises in the next quarter.
It’s already causing significant challenges. A study from MyWorkwear found that almost half of businesses (44%) are worried they won’t survive the next five years due to increasing costs. MyWorkwear says it is facing increased costs of around £100,000.
What is causing costs to escalate?
One key issue is the upcoming increase in employer National Insurance contributions (NICs) from 13.8% to 15% and a concurrent drop in the NICs threshold from £9,100 to £5,000. At the same time, the National Living Wage are both increasing..
Rebecca Fox, HR Technical Consultant at AdviserPlus, says these changes are only part of the picture. “In addition to these direct costs, there are potential indirect costs—like a possible surge in employment tribunal claims as a result of new day-one rights [and] the extended six‐month claim period.”
There’s also the right to statutory sick pay from day one, and the changes to redundancy rules that came into effect in January 2025, which could potentially drive up costs. Fox says: “These factors have made headcount management more complex, especially as businesses strive to maintain efficiency.”
Who will be impacted?
Chris Eastwood, Founder and CEO of Penfold, says organisations employing low-wage workers will see the biggest relative cost increase due to the reduced threshold. This is because they are often labour-intensive organisations with fixed budgets and have less flexibility in responding to the changes.
Sectors such as retail, hospitality and care services with minimum or median level wages face significant cost increases due to the NI changes.
“SMEs (small to medium-sized enterprises) without sufficient scale to absorb the increased costs, particularly those already operating with tight margins, may also struggle to maintain profitability,” he said.
SMEs all over the country will be affected. How can accountants help?
Utilise the government’s help
There is relief for businesses. With the threshold for employer NI dropping, most employers with staff will see an increase in their NI liability. “The UK has approximately 5.5 million businesses, as of 2024 and about 2.6 million of these employ staff, meaning they will now all be subject to NI contributions,” Eastwood says.
To mitigate this risk, many small businesses can benefit from the increased Employment Allowance (from £5,000 to £10,500), which he says will reduce or eliminate the burden for some.
The Employment Allowance allows employers to reduce their National Insurance liability, is increasing from £5,000 to £10,500 from April 2025. The allowance was limited to those with NI liabilities under £100,000, but this restriction is being removed to broaden the relief to more businesses.
Invest in people management
Fox believes investing in effective people management and employee relations is often overlooked as a mitigating factor, but can play a crucial role in controlling costs and improving productivity.
One example is ensuring that policies and procedures are properly followed to prevent disputes from escalating. Giving managers the right tools allows them to handle employee issues confidently and effectively. This way most problems can be solved informally, while bigger issues are spotted early and managed properly, reducing the risk of expensive legal claims.
“During periods of financial pressure organisations often resort to cutting headcount to protect their bottom line. However, in a tight labour market, this can be a costly mistake in the long run.”
Rebecca Fox, HR Technical Consultant, AdviserPlus
When there is no choice but to reduce headcount, organisations must protect the business reputationally, both internally and externally. “The morale of those who remain in the business is just as important as those who have exited,” Fox says. “Redundancies need to be carried out with compassion and transparency as well as correctly to avoid unnecessary risk and costs.”
Salary sacrifice
Salary sacrifice is a key strategy for employers to mitigate the impact of the NI changes, allowing employees to redirect a portion of their pre-tax salary into non-cash benefits such as pensions. This reduces the employee’s taxable salary, leading to savings on NI contributions.
Eastwood believes this can be hugely beneficial for employers: “By lowering the gross salary through salary sacrifice, employers decrease the amount subject to NI, thereby reducing their overall NI liability.”
“It can also be helpful in overall cost management – salary sacrifice schemes can help offset the increased costs due to the NI rate hike and threshold reduction, aiding in maintaining financial stability.”
Employees also benefit through boosting their pension savings through pre-tax contributions, increasing their retirement funds. “It can also reduce their taxable income which can lead to savings on personal NI contributions, potentially increasing take-home pay,” Eastwood says.
The IFA webinar – 6 ways to mitigate the NIC increase with EB Now – will be held on 30 April. More information here.
