Is your business ready for the increased cost of employment?
The conclusion of the tax year in April is a busy time for UK businesses. This year is no exception and is further complicated by a raft of significant payroll changes coming for the tax year 2025/26.
Associate Director Martin Kerr looks at the upcoming changes and offers advice on ways businesses can prepare for, and mitigate against, the increased cost of employment.
Chancellor Rachel Reeves’ first Autumn Budget as Chancellor and its impact on business growth has been in the headlines since it was announced in October 2024. However, some of the more weighty elements are due to come into force this April and this is when businesses will understand the full impact on the cost of employment.
The cost of employment: National Minimum wage set to increase
On 6 April 2025, the National minimum wage for employees aged 21 or over will increase from £11.44 to £12.21 per hour. This represents an increase of 6.7%, which is particularly significant as inflation continues to sit above the Bank of England’s target rate of 2%. There are also sizeable minimum wage increases for employees aged 18-20. They will receive an hourly increase from £8.60 to £10, with those aged under 18 getting an increase from £6.40 to £7.55 per hour.
For employees in these age categories, the increase will be warmly welcomed as they represent above-inflation increases of 16% and 18% respectively.
Employers’ National Insurance rate rises to 15%
The Employers’ National Insurance rate will also increase in April 2025 from 13.8% to 15%. Businesses with employees earning above the lower earnings threshold will be impacted by the change. Although it represents just a 1.2% increase on the current Employers’ NI, it is a real terms increase of 8.7%.
Employers’ NI threshold decrease will raise costs for employers
At the same time, the lower earnings threshold for employees will decrease from £9,100 to £5,000 per annum. This is the point at which businesses start to pay Employers NI contributions.
Though it didn’t capture the post-Budget headlines as much as the Employers’ NI and minimum wage increases, it represents a substantial cost pressure for employers. For example, this will lead to a £650 increase in Employers’ NI contributions for an employee earning £12,000 per annum compared to the previous tax year (2024/25).
Cumulatively, the various changes mean that the cost to a business of employing will greatly increase.
How much will NI and Minimum wage increases cost employers?
Our calculations show that for an employee aged 21 or older earning the National minimum wage on 35 hours per week, their employer will pay an additional £2,367 per annum in wages and Employers’ NI. That represents a 10.5% increase year-on-year. It is important to note that this excludes the additional Employer pension contributions associated with the increased National minimum wage.
Unfortunately, the increase in cost pressures doesn’t end there; business owners must consider the knock-on effect from other inputs. For example, even if you are a small business with zero employees, you could still see an increase in costs if suppliers raise prices to cover their higher employee costs.
How can I protect my business against the increased cost of employment?
Few businesses will completely escape the impact of the Employers’ NI and Minimum wage changes. Therefore, it is prudent to consider how to mitigate these cost increases.
- Wage cost analysis: assess what the increase in wage costs will be on your business, especially in terms of cash flow and profitability
- Negotiate with suppliers: consider negotiating with suppliers, as you may be able to agree to early settlement or bulk discounts. If cash flow allows, could buying a larger quantity of non-perishable items obtain a lower price per unit?
- Switch suppliers: if some suppliers elect to absorb rather than pass on their wage costs switching suppliers could be useful. This needs to be weighed against any lag in price increases, different product/service quality/characteristics, and any knock-on implications of switching
- Review your pricing: based on the points above it may not be feasible to absorb your increased wage costs without cutting gross margin or profitability. Customers may be less resistant to price increases given the recent period of high inflation but this will depend on factors like your product/service, marketplace competition, and your customer profile
- Review all input costs: consider other costs such as raw materials or component elements. Are there any input costs you can reduce or are no longer required?
Employment allowance increase offers employers a silver lining
On a positive note for business owners, employment allowance that is received as a deduction of Employers’ NI liability is being increased from £5,000 to £10,500 from 5 April 2025. There is also an easing of some of the current restrictions on claiming this allowance, meaning more businesses can claim this relief.
This increase will only benefit businesses with minimal employees as any benefit will be eroded by the increase in NI costs outlined above. In the face of rising costs, owners need to ensure they are claiming all tax reliefs and allowances available to their business.
Payroll, Accounting and Tax services to help your business manage rising costs
Consilium has an expert Payroll team that can guide you and your business through these changes. If you currently process Payroll in-house, it might be a good time to consider outsourcing to Consilium.
We can process weekly, fortnightly, monthly, or annual payrolls, deal with all HMRC and pension submissions, and provide an online portal for employees to receive payslips. If the thought of all these changes is causing you concern, please get in touch. With our Payroll, Accounting and Tax services, we can remove the headache and leave you to focus on growing your business.
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Martin Kerr has been a qualified Chartered Accountant since 2003 and has extensive experience advising business owners in the SME sector. As Associate Director, Martin works with owner-managers and entrepreneurs to support their Accounting functions, including Cloud Accounting, Management Accounts, and VAT returns.
