Businesses need to respond proactively to tax increases.
Last years' budget introduced significant changes affecting business costs, particularly through increases in employer National Insurance contributions (NICs) and the National Minimum Wage (NMW). Whilst these measures aim to enhance worker pay and contribute to public finances, they present substantial financial challenges for UK businesses. We believe that businesses must plan to respond proactively to the impacts that the tax hikes will have on their businesses.
From April 2025, the employer NIC rate will rise from 13.8% to 15% with the earnings threshold at which employers begin paying NICs decreasing from £9,100 to £5,000 per year. These changes mean employers will pay higher NICs on a larger portion of employee earnings, increasing overall employment costs.
In addition to this, businesses face another increase in national minimum wage levels.
For workers aged 21 and over, the National Living Wage will increase by 6.7% to £12.21 per hour from April 2025, with 18–20-year-olds seeing the minimum wage rise by 16.3% to £10 per hour.
The simultaneous rise in employer NICs and the NMW will significantly increase labour costs. Business leaders have voiced concerns that these measures will elevate operational costs, potentially leading to job cuts, higher consumer prices, and reduced investment with others indicating that the UK is becoming less attractive for business investments due to these tax increases.
The Confederation of British Industry (CBI) conducted a survey revealing that many firms are planning to cut jobs and delay recruitment in response to the increased tax burden and have urged swift action from the Government to restore confidence.
Talking to many businesses since the budget, I am hearing the same things. They are concerned that they will face several challenges:
Reduced Profit Margins – Higher employment costs will compress profit margins, especially for labour-intensive sectors.
Price Increases - To offset increased costs, businesses believe they may need to raise prices, potentially affecting competitiveness and consumer demand.
Employment Decisions - Some companies are reconsidering hiring plans and reducing staff or apprenticeship plans to manage rising expenses.
Investments paused – With spare funds being required to meet the increase in payments businesses feel that they can’t invest in growth.
There is no doubt that these rises will present both challenges and opportunities for businesses. I believe that businesses need to respond positively to address the increased pressure on costs whilst maintaining competitiveness.
Reassess your financial plan
Analyse how these changes will affect cash flow, profit margins, and overall financial health whilst identifying the possible impacts on the business. Business owners/managers then need to prioritise areas that are crucial to future business health, revising budgets and reallocating funds to prioritize mandatory expenses whilst identifying areas for cost optimization.
Improve efficiencies
Reviewing processes and streamlining operations can reduce reliance on employees and save money. Automating processes may require investment but could benefit the firm in the long run and identifying inefficiencies in workflows and supply chains can minimize waste and improve productivity.
Review your pricing
Noone wants to increase pricing but passing on some of the increased costs to customers may be necessary to minimise the impact to your business. You need to consider if the market can absorb it without a significant drop in demand. You should consider how you can enhance your offerings to justify any price increases, ensuring customers see added benefits.
Maximise your employee base
Decisions may need to be made regarding your employee base. There are several things you can do. Look at whether roles can be consolidated or reorganised to bring efficiencies to your workforce. Be flexible - can you fill gaps with part-time or contract staff to help manage costs. If it’s possible, continue to invest in training to upskill employees to improve productivity and reduce reliance on hiring additional staff.
Leverage Government initiatives
Identify and take advantage of any Government schemes or tax credits that you might be eligible for which help you to invest in apprenticeships or green initiatives to help you offset some of these increased costs.
Remember innovation is key
When your business is hit by increasing costs, your focus will inevitably switch to how you increase revenue. Identifying and exploring new revenue streams through offering new products/services or entering new markets can present excellent opportunities to drive long term growth to offset increased expenses.
Negotiate and collaborate
When revisiting your finances it is a great time to renegotiate supplier contracts to secure better prices, volume or early payment discounts. Local organisations or industry groups also present an opportunity to garner support or share cost saving initiatives.
Monitor and Adapt
It’s important that in challenging times, you continually review both the financial and operational impact of the tax changes to ensure that the changes you are implementing are having a positive impact. You should be prepared to adapt if things aren’t going your way. Remember to stay alert to any other changes that may come your way and which may need a quick response to ensure your business is protected.
By taking a proactive and strategic approach, businesses can mitigate the impact of increased employer National Insurance and minimum wage rises, while positioning themselves for long-term sustainability and growth.
