National Insurance Increase Impact on SMEs

Speaker 1 0:41

Hello and welcome to Buzzing About HR , the podcast where we break down HR , employment law and all the challenges facing small businesses today in a way that actually makes sense . I'm Kate Underwood , your host , and today we're diving into a topic that's causing quite a stir amongst small and medium-sized enterprises across the UK the upcoming increase in national insurance contributions . If you're a business owner or HR professional , you're probably feeling the impact of this upcoming change . Employer NI contributions will rise to 15% , up from 13.8% as announced in the October 2024 budget at the beginning of April 2025 . This increase applies to employees earning above £12,570 per year and there's no change for self-employed national insurance rates . So what does this mean for SMEs ? Why is it significant and , most importantly , what can business owners do to manage this impact ? Recent reports have shed light on the gravity of the situation . A survey conducted by the Chartered Institute of Personnel and Development no-transcript . Additionally , two in five employers intend to raise prices to offset these costs . This surge in redundancy intentions is the highest we've seen in the past decade , excluding the pandemic period . Peter Chees , the Chief Executive of the CIPD , said Understanding the National Insurance Increase . Okay , so let's break this down .

Speaker 1 2:46

What exactly has changed with National Insurance , because if you're running a business , you've probably already noticed that your payroll costs are going up , and by the end of April 2025 , they'll be going up even more . But why ? And what's the bigger picture here ? So what's changing ? The employer national insurance contributions are set to rise to 15% , up from 13.8% . This applies to anyone earning £12,570 per year . Just to note , there are no changes have been made to self-employed national insurance contributions . But if you're an SME owner with employees , you are going to feel the squeeze . So what does this actually mean for businesses ? Well , let's put some real numbers on it . If you have 10 employees earning £30,000 a year , you're now paying an additional £3,000 annually just in national insurance . That's money that isn't going into hiring , isn't going into staff benefits and isn't going into growing your business .

Speaker 1 3:59

According to the CIPD's latest report , 32% of employers are now considering redundancies to offset the increased cost . 42% of businesses are planning to raise prices to cover their growing payroll expenses , but only 12% of employers said they feel able to absorb the costs without any significant changes to their workforce . And let's be real here the businesses that can absorb this are typically the big corporations with deep pockets . Smes , on the other hand , are left making tough decisions Either reduce staff hours , delay hiring or cut back on other areas like training and development . So why has this happened ? Why is national insurance going up ? And why now ? Because , let's be honest , it's not exactly great timing with everything else going on in the economy .

Speaker 1 5:01

What is the bigger picture ? So we've got the government fiscal policies . The UK government has been looking for ways to increase tax revenues to balance the books after major public spending during the pandemic . Raising employer national insurance is one of the quickest ways to do that . Secondly , funding the public services and pensions . With an ageing population and growing demand on the NHS , the government argues that these funds are necessary to sustain public services and pension commitments . Thirdly , post-pandemic economic pressures . The economic recovery from COVID-19 hasn't been as strong as hoped and the government is trying to stabilise national debt while dealing with the cost of living crisis . But here's the thing Raising national insurance disproportionately affects small businesses because they don't have the financial cushion that larger corporations do .

Speaker 1 6:06

For an SME , an extra 30k in national insurance costs across their workforce could be the difference between hiring someone new or having to let somebody go . Since the national increase was announced in October 2024 , 50% of SMEs have reported delayed hiring plans and one in five SMEs is now actively restructuring their workforce to cope with the higher costs . So that's the lay of the land . Payroll costs are going up and more businesses are now looking at where they can cut back . And here's the big question what can you actually do about it and what alternative workforce strategies could help you reduce the impact ? Well , that's exactly what we're going to get into next Immediate impact on SMEs .

Speaker 1 7:03

All right , now that we know what's changed with national insurance , let's talk about how it's actually hitting small businesses . Because , let's be honest , the numbers might look small on paper , but in reality , they're having a huge impact on payroll , hiring and overall business strategy . Firstly , higher payroll costs . The squeeze on the SMEs . First off , the most obvious impact it's now more expensive to employ people . If you're an SME , chances are your payroll is already your biggest cost .

Speaker 1 7:45

This national insurance increase is just making it even harder to balance the books . But what does this mean in real terms ? So , firstly , increased costs per employee . The cost of keeping your team has gone up overnight . If you have 20 employees earning £35,000 a year , your national insurance bill has just jumped by nearly £6,000 annually , squeezing already tight profit margins . Many SMEs don't have the cash reserve to absorb this , especially after years of dealing with inflation , rising supplier costs and economic uncertainty and knock on effect on growth . So instead of investing in expansion , training or pay rises , smes are now funneling that money into tax obligations instead .

Speaker 1 9:34

65% of SMEs say raising employment costs are now their biggest financial burden . Almost half of small businesses say that this will directly impact their ability to invest in their workforce and 32% of business owners are considering redundancies to compensate . It's not just business owners feeling the pinch . This is affecting employees too . A lot of companies are now freezing salary increases , reducing benefits or delaying hiring altogether . So let's talk about hiring freeze and redundancies and the fallout for the workforce . Let's talk about hiring and , more specifically , how it's slowing down .

Speaker 1 10:25

For a lot of SMEs , the response to rising national insurance costs is simple Pause recruitment , cut back and reassess what's happening now . So we can see delaying hiring . Many SMEs are now holding off on hiring new staff , even in roles that they urgently need . We can see reducing headcount . Some businesses are reassessing their team sizes , meaning redundancies or cutting temporary contracts , and finally , struggling to compete With rising costs .

Speaker 1 11:01

Smes are finding it harder to offer competitive salaries and attract the right talent . So this is an SME case study . Smes are finding it harder to offer competitive salaries and attract the right talent . So this is an SME case study of a struggling manufacturer . A manufacturing company in the Midlands recently told me that they were planning to hire 10 new employees this year to meet growing demand , but after this national insurance increase , they've slashed that number to just three .

Speaker 1 11:29

The reason Payroll costs are now eating into their expansion budget . Instead , they're now looking at automation and process efficiency , which means fewer jobs created overall . And this isn't just happening in one industry Retail , hospitality , tech and even professional services are all pulling back on hiring . 50% of SMEs have put hiring plans on hold due to rising employment costs . 22% of businesses are already planning redundancies in the next six months , are already planning redundancies in the next six months , and one in four SMEs say that they're struggling to retain staff because they can't afford increased wages . So what did this mean in the long run ? Well , it's a double-edged sword , because while businesses are struggling to afford staff , employees are also feeling the squeeze of rising costs , leading to higher turnover and lower retention . It's a vicious cycle that makes it harder for SMEs to keep good people .

Speaker 1 12:36

The contractor versus employee debate . Is this a risky alternative ? Now , one of the biggest shifts we're seeing is SMEs looking for workarounds to avoid these rising employment costs and one of the most common strategies switching to contractors instead of employees . Why some SMEs are turning to contractors ? Firstly , there's no employer national insurance contributions . Unlike full-time employees , businesses don't have to pay national insurance on contractors , which can mean significant cost savings . Two , more flexibility . Contractors don't come with the same obligations no sick pay , no redundancy rights and usually fewer HR headaches . And finally , easier to scale up and down . For businesses with fluctuating demand , contractors provide more control over costs . 40% of SMEs are actively considering more freelance and contractor roles to reduce costs . Freelancer job postings have increased by 15% since the national insurance hike was announced and 20% of employers admit that they're looking at contractor options to bypass employment taxes . Now this seems like a no-brainer right Ditch the employment costs , bring in contractors and problem solved .

Speaker 1 14:06

But it's not that simple , because if you're not careful you can land yourself in hot water with the HMRC , the IR35 risk and what employers need to know Misclassification could cost you . If HMRC decides that a contractor is actually acting as an employee , you could be liable for backdated taxes and penalties . Control and integration matter . If you dictate when and where and how work is done , the HMRC may see that contractor as an employee in disguise . And legal battles are increasing . The government is cracking down on false self-employment , meaning more businesses are being investigated the IR35 wake-up call .

Speaker 1 15:02

One business I spoke to let's call them Tech Solutions Limited decided to replace five full-time employees with freelancers to save on national insurance costs . At first it worked like a charm until HMRC flagged it under IR35 rules , deciding that those contractors were actually employees in disguise . The result A £50,000 tax bill and a major legal headache . So while switching to contractors can be a smart move , it's not a shortcut to cutting costs . Get it wrong and you could end up paying way more in the long run . The takeaway Be strategic , know the risks and get professional advice before making drastic staffing decisions .

Speaker 1 15:52

So let's say you've been listening to all this and thinking right . Fine , if hiring full-time employees is too expensive and IR35 is a minefield , maybe I'll just use more zero hours contracts . Sounds like a great workaround , right ? Not so fast , because Labour is now in power and they've got their sights set on scrapping zero hours contracts as part of the Employment Rights Bill and if you're an SME , this bill is shaping up to be a pressure cooker waiting to go off . So what could be changing ?

Speaker 1 16:29

So what exactly does the proposed Employment Rights Bill say about zero hours contracts ? The proposed plan is to abolish them and replace them with secure employment models . Employees on variable hours will get the right to request a predictable working pattern after 26 weeks . This means that employers may have to guarantee set hours rather than keeping things flexible . Now I know when some people hear zero hours , they immediately think exploitive gig economy work , uber drivers , delivery people getting shifts cut with no notice .

Speaker 1 17:09

But here's the reality . Not all zero-hour contracts are bad . In fact , a lot of businesses and employees

Navigating Changes in Employment Models

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like them because they offer genuine flexibility . Take hospitality , for example pubs , cafes , event venues . These businesses need flexibility because demand changes week to week and for employees , some love the ability to pick and choose shifts . Students , carers , semi-retired workers they all benefit from the freedom zero-hour contracts provide freedom zero-hour contracts provide .

Speaker 1 17:51

So here's a case study the hospitality industry's dilemma . I was speaking to a restaurant owner in London who relies on zero-hour contracts for around 40% of their workforce . She told me if I had to guarantee set hours for everyone , I'd either have to overstaff and lose money or understaff and ruin the customer experience . There is no middle ground . Now , under the proposed new bill , she'll have two options either to give staff permanent contracts with guaranteed hours , which means higher costs , less flexibility and the risk of paying people when there's no work , or reduce staff numbers and only schedule people when absolutely necessary , which means fewer job opportunities and higher pressure on the remaining team . This isn't just a hospitality issue . Healthcare , retail and seasonal industries will all rely on zero-hour contracts to adapt to demand . Over 1 million UK workers are currently on zero-hour contracts . Nearly 60% of those workers say they prefer the flexibility , and one third of SMEs in hospitality say a ban on zero-hour contracts would force them to reduce staffing levels . So while the intention behind the proposed bill is good to prevent workers from being exploited the reality for small businesses is a lot more complicated .

Speaker 1 19:18

Because , let's be honest , if you can't use zero-hour contracts anymore , what are your alternatives ? So what can you use instead ? If you currently rely on zero hour contracts , now's the time to start thinking about life without them . Here are some alternative employment models you might need to shift to . So , firstly , there's annualised hours contracts Instead of a fixed weekly schedule . Employees work a set number of hours per year , giving flexibility while still ensuring job security . Then there's part-time contracts you can schedule staff more predictably but still control costs by keeping hours low . By keeping hours low . Fixed-term contracts good for seasonal work or short-term projects rather than committing to full-time employment . And finally , shift-based rotas with minimum hour guarantees . So instead of fully flexible schedules , you guarantee a base number of hours per week with the option for extra shifts . Now I get it . None of these options offer quite the same level of flexibility as zero-hour contracts .

Speaker 1 20:36

But if the Employment Right Bill does go ahead , businesses will have no choice but to adapt . So my advice Start trialling new contract models now , rather than waiting until you're forced into a last minute change . Because here's the bottom line Whether you like it or not , the rules are changing and SMEs need to stay ahead of the curve . So to sum up , payroll costs are rising , making it harder for SMEs to retain staff . Hiring freezes and redundancies are increasing , with businesses struggling to avoid new hires . More businesses are looking at contractors , but IR35 risks are a major concern . Zero hours contracts are on the chopping block under the proposed Employment Rights Bill . For some industries this could cause major headaches , particularly hospitality , retail and seasonal businesses , and if you rely on zero hours contracts , start looking at alternative employment models . Now this isn't just speculation . It's happening right now across the UK and if you're running a small business , you need a strategy to navigate these changes .

Speaker 1 21:54

So what's next ? In the next section , we'll break down what the government is doing about this Spoiler alert not much and what practical steps you can take to protect your business . Stick with me , this is where it gets really interesting . So what are the knock-on effects for employees and business growth ? So far , we've covered the immediate impact on SMEs rising payroll costs , hiring freezes and even the shift towards contractors . But what about the employees themselves ? What does this mean for pay perks and job security ? Because , let's be honest , when businesses fill the squeeze , employees do too .

Speaker 1 22:40

So wage suppression no rises on the horizon . We all know wages have been a hot topic lately . Workers are demanding higher salaries to keep up with inflation and the cost of living crisis , but the employer national insurance now at 15% as of April 2025 , many SMEs are struggling to offer even the smallest pay increases . Smes are struggling to offer even the smallest pay increases 41% of SMEs say they cannot afford pay rises this year due to increased employment costs , and one in three employees say they feel undervalued because their wages haven't kept up with inflation .

Speaker 1 23:25

I spoke to a business owner in retail who told me she usually gives her staff a three to five percent annual increase to keep morale high . This year zero , she said . If I raise salaries I'll have to cut jobs . It's as simple as that . And she's not alone . This is happening across hospitality , retail , professional services and even the tech sector . So employees are earning the same , but their living costs have gone up , which , let's be honest , isn't great for engagement or productivity .

Speaker 1 23:54

And that brings us to the next big issue benefits the impact on employee benefits perks . Under pressure If pay rises are off the table , employees look to benefits things like bonuses , pensions , training budgets and wellness perks . But guess what ? Those are also being cut . 29% of SMEs have already reduced or plan to reduce staff benefits , 15% have cancelled bonuses that originally planned for this year and nearly one in four businesses say they might stop matching pension contributions . A small consultancy I work with had free gym memberships and a learning budget for employees Gone .

Speaker 1 24:42

The national insurance increase means that they literally cannot afford it anymore , and now they're worried about losing key staff . It's a downward spiral . When employees feel undervalued , they leave , and then replacing them costs even more . It's no wonder so many businesses are worried about retention , delayed expansion plans , growth put on hold . Now here's another knock-on effect we don't talk about enough . Businesses that were planning to grow are now hitting the brakes because , let's face it , expansion costs money and money is tight . Face it expansion costs money and money is tight . 47% of SMEs say that they've delayed or cancelled expansion plans due to the national insurance increase . 20% have postponed hiring for the leadership roles that would have supported their next phase of growth . A hospitality chain I work with was set to open three new locations this year . That's now one , they told me . The national insurance increases have eaten into our budget . We simply can't afford to take the risk , and if businesses aren't expanding , that means fewer jobs , fewer promotions and a stagnant economy .

Speaker 1 26:03

So is the government stepping in to how SMEs weather the storm ? Well , let's talk about it . So what's the government saying , right ? So is there any relief for small businesses ? Short answer not much . Long answer let's break it down .

Speaker 1 26:24

So let's look at what is available . So , at the moment , there is an employment allowance If your employer national insurance bill is under £100,000 , you can claim £5,000 relief per year . There is no extra support for larger SMEs , so if your national insurance bill is over 100,000k , you get nothing extra . Over 50% of SMEs say the employment allowance is not enough to offset raising costs and 26% of business owners have called for an additional tax release for employers . So while the employment allowance is helpful , it's really just a drop in the ocean for most businesses , and that's why we're seeing more pressure on the government from trade bodies and business groups to introduce further reliefs . But will they listen ? We're going to have to wait and see Practical actions employers can take today . Okay , we've covered the problem . Now let's talk about solutions . If you're running an SME , here are some practical steps that you can take right now to protect your business without cutting staff or benefits .

Speaker 1 27:48

Firstly , review workforce costs and restructure if needed . The first thing to do is to look at your workforce structure . Where can you make adjustments without sacrificing productivity or compliance ? For many businesses , full-time employment isn't the only option , but be careful about misclassifying workers and falling into the IR35 traps . Alternative workforce structures to consider would be part-time contracts , which reduce national insurance costs while keeping skilled staff engaged . Job sharing models Split a full-time role between two employees , reducing tax burdens .

Speaker 1 28:30

Annualised hours contracts Employees work a set number of hours over the year , giving seasonal flexibility . Fixed-term contracts Ideal for short-term projects or seasonal peaks without long-term cost commitments . Freelancers and contractors useful for specialist projects , but always check IR35 compliance . And finally , shift-based rotors with minimal guarantees . Instead of full . Zero-hour contracts offer set base hours with flexible add-ons . Zero-hour contracts offer set base hours with flexible add-ons . If you've relied on zero-hour contracts in the past , now is the time to trial new employment models before you're forced to do so by law . The key is finding flexibility while staying legally compliant .

Speaker 1 29:19

Secondly , maximise tax reliefs and grants . Next , let's talk about financial relief where you can , because if you're paying more in employer national insurance , you can make sure you're not overpaying elsewhere . What can you do right now ? You can claim the £5,000 employment allowance if your NI bill is under a hundred thousand pounds . Look into sector-specific tax reliefs , eg research and development tax credits for innovation-based businesses , and apply for regional business grants . Some local councils offer funding to offset rising employment costs . Many businesses aren't aware of the financial support available , so do your research and , if in doubt , speak to your tax advisor or HR consultant . Thirdly , optimise payroll and HR costs .

Speaker 1 30:19

With payroll costs rising , small tweaks to how you manage salaries and benefits can make a big difference . Here are a few cost-saving payroll strategies that won't impact employee morale . Ways to lower payroll costs without cutting pay Implement salary sacrifice schemes . Employees trade part of their salary for non-cash benefits , eg pensions . Cycle to work . Reducing the national insurance liabilities . Cut unnecessary overtime . Tighter shift management can reduce excessive hours without reducing output .

Speaker 1 30:59

Use performance-based initiatives instead of across-the-board pay rises . Bonuses based on business performance can be more sustainable than fixed pay increases . Payroll is your biggest expense , so being smart about it now can save thousands over the year Employer retention and engagement . We've already seen that many SMEs can't afford pay rises this year , but that doesn't mean that you can't keep your employees engaged and motivated . Alternatives to salary increases Remote working and flexible hours Still a top of employee demand and a cost neutral for employers . Extra holiday leave instead of pay increases an affordable perk that boosts work-life balance , career development and upskilling . Employees value learning opportunities , which can increase retention without increasing costs . And profit sharing schemes Instead of fixed pay rises , offer bonuses tied to company performance . 72% of employees say that they value flexibility as much as salary , and companies with strong engagement strategies see up to 21% higher profitability . When people feel valued and invested in , they're less likely to leave , even if salaries aren't increased as fast as they'd like .

Speaker 1 32:32

Prepare for future changes . Finally , we need to talk about what's coming up next because , let's be honest , this probably isn't the last tax increase or employment law shake-up . We'll see how to stay ahead . Keep up with the budget announcements . Policies are consistently changing and early action can save you money . Engage with SME networks . Trade associations and business groups often lobby for better SME protections .

Speaker 1 33:04

Review contracts and policies . If zero hours contracts disappear , make sure you have a plan B in place . Review contracts and policies . If zero hour contracts disappear , make sure you have a plan B in place and work with legal and HR advisors . Get ahead of compliance issues before they become costly mistakes . The businesses that plan ahead now will be in a stronger position when more changes come down the line . Don't wait until it's too late to adapt .

Speaker 1 33:40

That's a wrap on today's episode . Let's quickly recap . Payroll costs are up , but strategic

Strategic Workforce Planning for SMEs

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workforce planning can help . Zero hours contracts are on the way out . You should start trialling alternatives now . There are tax release and grants available and use them to your advantage . Retaining employees doesn't have to mean pay rises . Get creative with benefits and stay ahead of policy changes . What you do now will impact your future costs . If you need any practical support navigating these changes , please contact me on buzz at kunderwoodhrcouk for an HR strategy session , contract review or one of our free HR health checks . Make sure you subscribe for more SME insights and I'll see you in the next episode .