It’s now a month since changes to Employers National Insurance contributions, announced in the UK Budget 2024, shook the business world to the core with changes that upturned even the most intricate of plans and forecasts.
The changes, taking effect from April 6, 2025, require careful navigation to minimise the impact on business finances. At Palmers Accounting, we have been assisting our clients with new planning and forecasts, since the Autumn Budget was released.
Is it all doom and gloom?
Actually, no. Our reviews show that despite the initial fears about how the changes will annihilate profit margins for SMEs, not all businesses necessarily need to pay more, providing they plan and work to an up-to-date forecast that factors in these changes.
For others, however, the news isn’t quite so positive and the proposed changes, combined with the substantial increases in the National Minimum Wage, are going to place significant pressure on business finances.
So, does your business need to restructure in order to avoid cash flow difficulties due to the change in employer’s national insurance contributions? If so, what strategies can you implement to get back on top quickly?
We’ll help you figure that out.
Part of our role is ensuring a business navigates 2025 effectively with fresh forecasts and plans that relate to these new numbers. If you’re keen to grasp the issue more fully and keep your business thriving, keep reading our guide to understand and navigate the rising costs related to employer’s National Minimum Wage.
The first step is to assess your unique situation. In this guide, we’ll help you answer three questions:
1) What is changing in employer’s National Minimum Wage costs?
2) How do these changes actually impact my cash flow forecasts and -ultimately- my business?
3) Will these be sustainable in my business?
What’s changing in Employer’s National Insurance contributions?
Let’s quickly run through the specifics about what is changing. Effective from 6th April, 2025, these are the changes in employer’s national insurance contributions and national minimum wages, which will directly impact labour costs for employers.
Rate increase:
The rate of employer NICs will increase from 13.8% to 15%
Threshold decrease:
The threshold for employee earnings that triggers employer NICs will decrease from £9,100 to £5,000 per year
Employment Allowance increase:
The Employment Allowance will increase from £5,000 to £10,500
Eligibility threshold removal:
The £100,000 eligibility threshold for the Employment Allowance will be removed
The National Living Wage for ages 21 years and over
(NLW) (payable to those aged 21 and over) will increase to £12.21 per hour.
The National Minimum Wage for ages 18-20 years
(NMW) (payable to those aged 18-20) will increase to £10 per hour.
How will this impact my business?
In a nutshell, an employee is now more expensive for an employer, and it’s this that has many business owners wondering how they’ll balance their need for their workforce against the cost of having one.
Did you know??? The increase in the Employment Allowance has mitigated some of the costs but the more staff you have, the more important it is to project forwards and understand exactly what the impact will be on your bottom line, so we still need to look at the numbers and plan accordingly.
How your business will be specifically affected by these changes is going to depend on the size, employee base and circumstances of your business, and these are all factors that are best reviewed with specific numbers from your accounts; we’re happy to help you with this, if you need.
But how will this actually impact businesses in broad terms? Where will businesses see and feel the strain? Understanding this is important to planning an effective strategy in 2025.
Increased cost of workforce
Larger businesses are going to bear the brunt of the pain, in monetary terms, due to higher employment numbers.
However, smaller businesses with high staff ratios, such as hospitality and service roles, are going to be impacted as they struggle to pay for service essential staff from a smaller budget. This is a direct threat to whether a business is viable at all.
Estimates show that an employer will pay approximately 20% more NI Contributions for an employee earning around £20,000 annual salary, but what does that actually mean as a number for you to use in your calculations? We’ll help you assess that below.
Increased strain on business finances
Staffing is often one of the non-negotiable expenses, around which a business’ culture, processes and protocols are built. With this expense rising in cost, it is likely some business owners will need to cut expenses elsewhere.
Cutting expenses from other areas will obviously vary for each business and industry. Some expenses may be deemed superfluous to the essential service provision -and eliminated completely. Other expenses may need to be reduced by sourcing alternative suppliers, for example.
How to assess: Complete a cost analysis to categorise all expenses into ‘essential’ and ‘non-essential’ and obtain specific figures for the previous financial year. It will be helpful to balance these against the new labour costs.
Decreased profit margins
Unfortunately, many businesses will find the buffer for these rising costs in their profit margin, which means while a business may meet day to day expenses and survive, it’s difficult to thrive and save in order to reinvest into the business for growth.
At Palmers, we advise our clients to reinvest a percentage of profits back into the growth of their business; this is essential preparation for increasing resources such as equipment, staffing and contingency funds.
With slimmer profit margins due to higher workforce expenses, the development and growth of smaller businesses is certainly going to feel a strain, leading some to stagnate and -ultimately- fail, unless a firm strategy is established and adhered to.
How to assess: Work out your previous financial year’s expenses and profits as figures and expenses. Comparing previous percentages against forecast percentages will assist in a strategy development that can ensure your business is at least returned to a stable stage in 2025; a new growth plan can then be established for the next business planning period.
Strain and failure
Sadly, a number of businesses may find that an increased cost for essential labour and a low profit margin may well lead to their business failing.
If you are worried your business is threatened, it’s important to know there are other factors within the UK Budget 2024 which may assist your business in managing these costs, as well as strategies that can assist growth in your business, despite the changes.
Many of our clients requested a review, following the release of the new numbers, asking for tips on how to balance the new costs of employment and a review of their forecasts. As mentioned above, we found it’s not all doom and gloom for a number of businesses.
That said, there isn’t really a magic wand on this, other than being completely on top of your numbers and operations, tracking your labour to sales ratios with a laser focus so you’re not over-resourcing.
How to calculate your Employers National Insurance contributions
Understanding your new labour to sales ratios starts with gathering real numbers on the costs of your employees.
To work out how much National Insurance you need to pay for each employee, you’ll need to calculate how much they earn above the secondary threshold and multiply this by the NICs rate.
So, here’s an example for an employee who earns an annual salary of £35,000 in the current 2024-25 tax year:
Their weekly wage would work out at £673, which is £498 above the £175 threshold.
£498 x 13.8 percent = £68.72
This means you’d be paying a weekly sum of £68.72 in employer contributions (equal to £3,573.65 a year).
For the 2025-26 tax year, the amount you’d need to pay will increase to 15 percent above the now reduced weekly threshold of £96.
This means you’d pay 15 percent on £577 which works out at £86.55 a week, or £4,500.60 a year. That’s an increase of £926.95 compared to this year!
Thank goodness that the Government increased the Employment Allowance! It is estimated that as a result of the increase in the Employment Allowance, more than 865,000 micro-business employers will not pay any Employers NICs in the next tax year.
Practical strategies to mitigate the impact of Employers National Insurance contributions
Businesses need to take a step back and look again at their finances to assess exactly what the impact will be and how any additional costs can be funded.
We recommend that you do not put this off; the sooner you review your circumstances, the better prepared you will be to implement any changes that will ensure that you can continue to grow your business on a profitable basis.
Once you have run the numbers and understand exactly what the impact will be, you can start to consider strategies (and their costs) to protect your gross margin.
These strategies may include:
Increasing prices
In many cases businesses will have no choice but to increase prices. Faced with an 18% increase in National Minimum Wage rates for some of the age bands, some of this is going to have to be passed on your customers.
Often, we find that business owners are reluctant to increase prices but remember, your competitors are facing the same cost pressure, so are likely to be increasing theirs too.
Restructuring your team
Some businesses are already looking at how they resource their teams. What is absolutely critical is keeping control of your labour to sales ratios, not just as overall figures but as a breakdown, based on day of the week or time of day for some sectors.
This will inform your decision making so you can assess if, and when, you are over resourced and if you are, cut back.
Job redesign
Rather than cutting jobs, businesses may consider redesigning roles to allow the business to operate more effectively.
This builds on the experience of existing staff to include cross-training employees to perform multiple roles. It may be deemed that the training expenses of staff members would cost less than a separate member of staff fulfilling that role alone.
Salary freezes
Where team members are paid above the minimum wage, some businesses may look at freezing salaries or reducing pay increases to offset rising overheads
Redundancy
This may be an unfortunate response to weighing up your ‘Essential’ and ‘Non-essential’ expenses, as mentioned in the last section. As well as service subscriptions or non-essential equipment, it may be recognised that in a period of drought, a particular role in your business is non-essential.
Some roles could be replaced by other staff members picking up some extra duties or by automations in technology services that cost far less than a member of staff. As a result, some businesses may consider redundancies as a last resort.
Outsourcing
In a virtual world many businesses have outsourced elements of their operations overseas. The financial argument for outsourcing is often compelling and this will be increasingly the case after the Employers NIC and NMW increases take effect next April.
Utilise salary sacrifice schemes
Some employers have offered salary sacrifice pension solutions to save NICs for their staff and themselves. Where this is adopted and employees opt to divert part of their wages into their employer salary sacrifice scheme, so both employer and employee NIC can be saved. Salary sacrifice arrangement can be a way of mitigating payroll costs whilst also providing a morale boost too, by improving employee satisfaction!
Whilst adopting Salary Sacrifice arrangements may have an obvious appeal for both employers and employees alike, they also come with an administrative burden which may require employee contracts to be redrafted and even legal costs so may not be viable for all employers to implement.
Proactive budgeting and forward planning
Just because your costs may have increased as a result of the Budget’s changes to Employers National Insurance contributions, it doesn’t mean this has to translate to lower profits, but it does mean that -as business owners- we need to plan that much more effectively.
As accountants, we have been educating our clients on their finances, business continuity and scenario planning and helping them make long-term business decisions to ensure their businesses not just survive, but thrive.
How can we help?
We offer free one-to-one calls to help you figure out your Cash-Flow planning and strategies for improving your Gross Margin to ensure that you can operate on an agile and sustainable basis in the long-term.
Whether you’re facing a tough time right now or just want to be ready for when the changes kick in, this session will give you the tools to navigate it all. We can link your cloud accounting to our management reporting to:
- Improve your financial management and gain control of your numbers
- Identify opportunities to increase profitability
- Optimise your Cash Flow
- Create a ‘what if’ plan to scale your business
- Understand your business valuation today and what it could be worth when you choose to exit.
No pressure, just a friendly chat so you can plan your business for 2025.
