The UK government’s recent budget announcement introduced a 1.2 percentage point rise in employer National Insurance (NI), moving contributions from 13.8% to 15% beginning April 2025. This policy change aims to bolster public finances and fund essential services. However, for small business owners already facing economic pressures, this added financial burden poses significant challenges. Below is a concise overview of what’s happening—and how you can prepare.
Understanding the Impact
The NI hike will directly affect businesses with payroll costs above the updated Employment Allowance threshold of £10,500. Sectors reliant on high staffing levels—such as hospitality, retail, and care services—will feel the strain most acutely. These industries often operate on tight margins, and even a modest increase in employer NI can quickly tighten cash flow.
For growing businesses, the added cost per new hire may lead to difficult decisions: slowing recruitment, delaying expansion, or reducing investments in training and employee benefits. Combined with April’s National Minimum Wage increase, 2025 could bring unprecedented pressure on staffing budgets.
Key Updates
- Secondary Threshold Reduction
From April 2025, the Secondary Threshold—the earnings level above which employers must pay NI—will drop from £9,100 to £5,000. Employers will start paying NI on employee earnings above this lower limit. - Employment Allowance Increase
The Employment Allowance, which lets eligible employers reduce their annual NI liability, will rise from £5,000 to £10,500 in April 2025. The previous restriction preventing employers with over £100,000 in secondary Class 1 NI liabilities from claiming this allowance will also be removed, making more businesses eligible. - National Minimum Wage Increase
The National Living Wage is set to rise by 6.7%, reaching £12.21 per hour from April 2025.
Key Risks to Address
- Cash Flow Strain
Higher NI contributions may limit funds available for growth initiatives or emergency reserves. - Wage and Hiring Pressures
Balancing rising wages with increased NI costs could lead to wage freezes or reduced hiring. - Operational Cuts
Some businesses may reduce training, apprenticeships, or benefits to offset expenses—a risky approach in competitive labour markets. - Sector-Specific Challenges
Retail and hospitality, where staffing costs already consume a large portion of revenue, may need to rethink their business models entirely.
Actionable Strategies to Mitigate the Impact
As your accountant, here are practical steps to help your business adapt:
Optimise Payroll and Cash Flow
Maximise the Employment Allowance
Make sure you confirm your eligibility for the Employment Allowance, especially now that it’s rising to £10,500. Once you do, configure your payroll software to automatically apply this allowance so you’ll see the savings on your NI bill right from the first eligible payment. If you run several businesses, double-check the rules for claiming it across different entities.
Explore Flexible Staffing
Think about using freelance platforms, such as Upwork or Toptal, to handle project-based roles like marketing or IT. This approach helps you avoid the fixed NI costs tied to permanent staff. You might also want to consider part-time or zero-hour contracts if you have seasonal busy periods—just remember to follow all employment regulations. Some businesses also partner with umbrella companies for short-term staffing needs, which can shift NI liabilities elsewhere.
Review Pricing
Take a look at your market and your competitors to decide if a modest price bump—somewhere around three to five per cent—would be acceptable. You could also bundle products or services (like creating a “premium support package”) to give customers extra value while justifying a higher price tag. Above all, be honest about why you’re adjusting prices, tying it back to your rising operational costs.
Boost Operational Efficiency
Invest in Automation
Consider implementing or upgrading cloud-based accounting tools such as Xero or QuickBooks to automate your payroll, invoicing, and tax calculations. You might also want to explore inventory management systems like Unleashed for retail to cut back on manual stock takes. In hospitality or customer-focused industries, AI-driven solutions—like Tidio—can handle routine inquiries around the clock.
Streamline Processes
Map out your current workflows to identify any bottlenecks, whether it’s duplicated approvals or manual data entry. Training your team on time-saving tools like Microsoft Power Automate can free them up for more strategic tasks. And if some processes aren’t core to your business—such as payroll or HR—outsourcing them can be a cost-effective alternative.
Adopt Flexible Work Models
Shifting to hybrid or remote work can reduce overhead by lowering office-related expenses. Platforms like Slack or Microsoft Teams can help keep communication smooth, even with a geographically dispersed workforce. You could also trial compressed workweeks, like a four-day week, to cut down on utility bills. If you need to maintain a physical office, hot-desking software can help you make the most of every square foot.
Plan Strategically for the Long Term
Update Financial Forecasts
Start by modelling best-case, mid-range, and worst-case scenarios for the 2025–26 period. Factor in the NI increase, as well as potential rises in energy costs or inflation, to ensure you have a realistic snapshot of your financial position. Revisit these forecasts every quarter so you can pivot if market conditions change.
Consider Salary Sacrifice Schemes
One way to counter rising employer NI is to encourage salary sacrifice initiatives. By directing a portion of employees’ pay into tax-efficient benefits—like pensions, cycle-to-work schemes, or private healthcare—you can reduce the total amount subject to NI. For instance, a £1,000 pension contribution would cut employer NI by £150 if the rate is 15%. Just make sure to follow HMRC’s guidance on optional remuneration arrangements to remain compliant.
Time to Act
It’s natural to feel concerned about how the National Insurance increase and other rising costs could affect your day-to-day operations. Every business has its own unique pressures—whether it’s meeting payroll, juggling unexpected expenditures, or continuing to invest in staff development. However, these challenges can also open up new avenues for improvement. By taking a closer look at inefficiencies, exploring smarter ways of working, and embracing fresh business models, you might uncover solutions that will not only help you weather the immediate changes but strengthen your long-term foundations.
In practical terms, you could use this moment to streamline your processes, bolster your tech stack, and revisit recruitment strategies to ensure every new hire adds maximum value. You can also re-evaluate your cash flow, check for potential savings, and tap into grants or reliefs aimed at helping businesses adapt. Approaching this transition with a creative mindset could well position you to thrive—not just survive—in a rapidly evolving marketplace.
