National Insurance increases for employers – actions to take now
With two changes increasing National Insurance for employers and a minimum wage increase in April, employers are being urged to plan for these now. Early review of the effects of these increases will help to ensure a firms cash flows through 2025 are property considered. This is important as their may be significant cost increases for many firms.
National Insurance increases are likely to mean reduced 2015 pay rises for employees
From April 2025, The National Insurance rate employers pay is increasing to 15% from 13.8%. At a same time, a reduction in the secondary threshold, when employers start paying National insurance is being reduced from £9,100 to £5,000. This significantly increases the costs for employers.
With higher costs per employer, this could have a considerable impact on future investment and profits for many businesses. This is also likely to lead to reduced pay increases for employees in 2025 and maybe beyond.
At the time of writing, the median salary in the UK is £37,430. Currently, Employers’ NIC contribution for this salary would be £3,909. From April 2025, when these changes take effect, this will be £4,865, an increase of £956.
This equates to an increase of 2.3% of the gross cost (salary plus Employers’ NIC) of employing this individual.
With inflation currently running at 2.5% (based on December 2024 rates), those expecting inflationary pay rises in 2025 might be disappointed. Additional funds allocated by firms for pay rises are likely to have been swallowed up by increased tax.
The Office for Budget Responsibility estimate that 76% of the National Insurance rise will be passed onto workers via lower real wages.
The effect of increased National Insurance costs on the hospitality and retail sector
The hospitality and retail sectors are areas are likely to be severely impacted by these changes. This is alongside the increase in April in the National Living wage.
Whereas minimum wage will increase by 6.7% for full time workers (equating to £1,400 a year), for 18 to 20-year-olds, it is to increase by just over 16%. Whilst this is obviously good news for employees on lower wages, this is a huge burden for the sector who are also faced with higher business rates and increasing product costs. Hospitality businesses are closing at an alarming rate, and this is likely to increase in 2025.
Potential measures to mitigate these increased costs
Whilst some businesses may suffice with reduced (or no) pay rises in 2025, many businesses will be faced with more severe action to remain operational.
We are aware of one business whose wage bill is going to increase by around £400,000 next year. Unfortunately, they are now looking at making 20 redundancies to accommodate this. Some businesses, such as those in the hospitality sector may simply cease trading.
Whilst businesses are being proactive in reviewing staff levels. The changes to National Insurance and National Living wage come in as employees’ work rights are being strengthened. Whilst these prove additional benefits for employees, employers are having to take serious consideration to whether they can afford to keep employees who have been with them for less than two years. The compounded result of these two changes could see increased redundancies/termination of contracts that would otherwise not have occur.
Other considerations on how to offset increasing costs
Price rises, where possible , to pass on unrealised costs to customers will assist, although this is not always possible.
One area that should not be overlook is the basics of bookkeeping. Smaller business owners are often so entrenched in the day to day running of a business that they do not take a step back to analyse their records.
Ensuring a business has robust management accounts also provides many benefits, from improved decision-making with the provision of timely and accurate financial information that can help business owners make better informed decisions.
Management accounts can help in cost control by identifying areas where expenses can be reduced. Similarly, they can help identify cash flow issues before they become a problem. They also assist with budgeting and forecasting alongside performance evaluation.
Financial forecasts should be used to forecast the increases in costs and their impact on cash flows. These forecasts can be utilised to preform what if scenarios.
For many businesses, restructuring provides a host of benefits, including cost savings and increased efficiency. In many circumstances, it can lead to a reduction in administration costs as processes (and the employees involved) can be reduced.
If a business decides to downsize, it could consider outsourcing some of its operations at a much cheaper cost than in-house roles. this may include payroll and financial management.
Restructuring can also be useful in introducing new technologies. These are essential to growing a business and could significantly help to improve the efficiency of a business, providing further financial savings.
What is clear is that with increased employee costs, coupled with continued financial pressures from other areas, firms will need to be proactive in identifying areas to reduce costs and increase profitable business areas in 2025.
Alexander & Co – expert tax and accounting advice for businesses
Businesses should plan now for changes which will take effect in 2015 and consider how rises in tax and costs will affect them. In many cases, it may be beneficial to make changes now following a review of business operations.
To discuss how we can assist you, please contact us by completing the enquiry form on this page. Alternatively, you can email info@alexander.co.uk and we will be in touch.
Depending upon your personal circumstances, there are a wide range of areas where we can assist, these include:
- Financial forecasts
- Management accounts
- Audit and assurance services
- Company reorganisations, sales, mergers and acquisitions
- Succession planning and advice on exit strategies
- Inheritance Tax planning and mitigation advice
- Personal tax planning
Please reach out to discuss any of the above with us.
