The recent Budget, presented by Labour's Chancellor Rachel Reeves, includes what some are calling “the largest tax increase since 1993,” with £40 billion in tax hikes and spending cuts aimed at addressing a £22 billion fiscal shortfall.
Key measures in the employment space included:
- A rise in Employers' National Insurance Contributions (Er NICs) from 13.8 per cent to 15 per cent.
- A reduction in the NIC threshold from £9,100 to £5,000, starting April 2025.
- An increase in the Employment Allowance from £5,000 to £10,500, together with a removal of the ‘cap’ that currently prevents larger employers from claiming the Allowance.
Whilst the increase in Employment Allowance from next April is very welcome, it will only benefit employers whose annual Er NIC bill exceeds £5,000.
The increase in the rate of NIC and the reduction in the NIC threshold will significantly increase employment costs for many businesses, especially those with a larger workforce.
What will the changes in Employers’ NIC mean for my business?
The answer will depend on a few things: how many people you employee; how much they are paid; and whether or not your business qualifies for Employment Allowance. Your payroll team should be able to quantify the likely impact on your labour costs (with appropriate assumptions).
Whilst an increase in the rate from 13.8 to 15 per cent does not perhaps sound very much, when combined with the drop in the secondary threshold, from next April the changes could add around £866 per annum to the cost of employing someone on a salary of £30,000.
In most cases it will be the drop in the secondary threshold, rather than the increase in the headline rate, that accounts for most of the tax rise.
It’s worth highlighting here that the minimum wage will also rise by nearly 7 per cent next year, which will add additional cost to many payrolls and will disproportionately impact the hospitality and retail sectors due to their reliance on younger and unskilled workers.
Possible solutions for you and your business
With these changes coming in soon it’s helpful to consider mitigating strategies to protect your bottom line and reduce the risks imposed on your business.
The strategies could loosely be grouped into the following areas (not mutually exclusive):
- workforce
- alternative remuneration
- cost containment
- pricing
Here are some of the strategies you might want to look at:
Workforce
- Review your workforce structure: Consider the balance between full-time, part-time, and contracted employees. Using freelancers or outsourcing specific roles could reduce labour costs and provide more flexibility. One of the ironies of the new measures is that they will incentivise more contracting activity – though recent governments have generally sought to discourage independent contracting.
- Monitor the use of apprenticeships and training schemes: Take advantage of Government incentives for hiring apprentices or providing upskilling opportunities to current employees. These schemes often come with financial support or reduced NIC rates.
- Focus on retention and productivity: Reducing staff turnover can minimise recruitment and training costs. Invest in employee engagement and development to boost productivity and create a more resilient workforce.
Alternative renumeration
- Share remuneration: Revisit alternatives to simply loading more salary on the P&L (in the form of periodic pay rises or bonuses) every year. There are some good alternatives that enable companies to reward key individuals with shares, in a tax efficient manner; the EMI Share Option scheme is the best known example. We have helped many companies successfully launch these kinds of arrangements.
- Audit and optimise employee benefits: Review your benefits package to ensure it aligns with your budget and workforce needs. Consider offering non-cash benefits, such as flexible working hours or additional leave, which can improve employee satisfaction without increasing costs.
- Reassess salary sacrifice schemes: Explore salary sacrifice arrangements, such as for pensions or electric cars, to reduce NIC costs for both the employer and employee.
Cost containment
- Plan for wage increases strategically: If the minimum wage increase affects your business, forecast its impact and adjust your pricing or operational strategy accordingly.
- Review supplier contracts and overheads: Negotiate better terms with suppliers or switch to more cost-effective options to reduce business expenses and offset increased NIC costs.
Pricing
- Review your budgets and pricing: Ensure your budget/ forecast prices in the forthcoming changes and consider what other measures may be required, based on what the information is telling you; in particular, to what extent might you be planning price increases in order to pass the additional costs onto your customers? How might this impact demand? How might competitors respond?
Fundamentally, it’s a good idea to speak with your accountant/ tax adviser if you’re worried about the changes made by the Budget.
We’ll be able to help you react and prepare for the tax increases and financial pressures put upon your business.
