How will the NI increase affect employers?
In the wake of rising operational costs, businesses across the UK are under increasing financial pressure. Among the most significant recent changes is the announced increase in employer National Insurance (NI) contributions, which will take effect in April 2025. This adjustment includes a rise in employer contributions from 13.8% to 15% and a reduction in the threshold for Employer National Insurance Contributions (NICs) from salaries of £9,100 to £5,000. These changes are expected to have a profound impact on small and medium-sized enterprises (SMEs), influencing their employment strategies and operational decisions.
Increased Payroll Expenses
The increase in employer NICs represents a substantial rise in payroll expenses for businesses. For SMEs, which often operate with tight budgets and limited resources, the jump from 13.8% to 15% means every employee’s salary becomes more expensive to sustain. Moreover, the lowered threshold to £5,000 will subject more employees’ earnings to NICs, further increasing costs. For instance:
An employee earning £20,000 annually would previously have had their employer paying NICs on £10,900 of their salary (£20,000 - £9,100). With the new threshold, NICs will be calculated on £15,000 of their salary, significantly raising the employer’s contribution.
For SMEs with larger workforces or higher employee turnover, these changes could mean thousands of pounds in additional annual costs, straining their ability to invest in growth, innovation, or other critical areas.
For small entities the impact of NICs employment allowance might be alleviated by Employment Allowance which will rise from £5,000 to £10,500 in April 2025.
Strategic Impacts on Employment
Faced with higher payroll costs, SMEs are likely to revisit their employment strategies. Some of the potential adjustments include:
1. Hiring Freezes and Workforce Reductions
Many SMEs may opt to pause hiring altogether or reduce their existing workforce to offset the additional expense. This could lead to a tighter job market and slower business growth as companies struggle to balance staffing needs with financial sustainability.
2. Increased Reliance on Part-Time or Freelance Workers
To minimise NI contributions, businesses may shift towards employing more part-time, freelance, or contract workers who do not require the same level of employer contributions. This shift could change the traditional employment model within SMEs.
3. Automation and Digital Transformation
Rising employment costs may accelerate the adoption of automation and digital tools. SMEs could invest in software, artificial intelligence, and machinery to reduce dependence on human labour, especially for repetitive or administrative tasks.
4. Outsourcing
Outsourcing offers SMEs a practical way to navigate the challenges posed by increased NI contributions.
Outsourcing as a Strategic Solution
By transferring certain functions to external providers, businesses can reduce their reliance on in-house staff and mitigate payroll expenses. Here are some key benefits of outsourcing:
1. Cost Efficiency
Outsourcing eliminates the need to pay employer NICs, pensions, and other associated costs for in-house employees. Instead, businesses pay for services as needed, often at a lower overall cost than maintaining a full-time workforce for the same functions.
2. Access to Expertise
Outsourcing providers specialise in their respective fields, offering a level of expertise that may not be feasible for SMEs to maintain in-house. Whether it’s bookkeeping, IT support, marketing, or human resources, outsourcing ensures high-quality service without the need for extensive training or upskilling.
3. Scalability
Outsourcing provides flexibility to scale operations up or down as needed. This adaptability is particularly valuable for SMEs navigating fluctuating market conditions or seasonal demands.
4. Focus on Core Activities
By outsourcing non-core tasks, SMEs can concentrate on their primary business objectives, such as product development, customer acquisition, and revenue generation. This allows business owners to allocate time and resources more strategically.
5. Reduced Administrative Burden
Managing payroll, compliance, and HR tasks can be time-consuming and complex, especially with changing regulations. Outsourcing these functions reduces the administrative load and ensures compliance with legal requirements, including the new NI changes.
Practical Examples of Outsourcing Benefits
Consider an SME in the retail sector struggling with rising operational costs. By outsourcing bookkeeping and payroll management, the business can avoid the added burden of employer NICs for in-house staff handling these tasks. Outsourcing financial services can reduce overheads while maintaining quality and reliability.
For SMEs in growth phases, outsourcing can also enable access to advanced tools and services that might otherwise be cost-prohibitive. For instance, a startup outsourcing its bookkeeping or payroll can leverage the expertise and technology of a professional service provider without incurring the costs of hiring and training a dedicated in-house team.
Long-Term Strategic Adjustments
The changes to NI contributions underscore the importance of strategic planning for SMEs. Beyond immediate cost-cutting measures, businesses will need to evaluate their long-term approach to employment, investment, and growth. Key considerations include:
Adopting Hybrid Workforce Models: Combining in-house staff with outsourced solutions can provide flexibility and cost savings.
Investing in Technology: Leveraging digital tools and automation can help reduce reliance on human labour for routine tasks.
Outsourcing to Financial Experts: Engaging an outsourced provider for key services such as payroll, bookkeeping or tronc management can help SMEs optimise their operations and identify tax relief opportunities to offset increased costs.
Sustain Growth With Outsourced Services
The upcoming changes to National Insurance contributions will undoubtedly pose challenges for SMEs, increasing payroll expenses and compelling businesses to reconsider their employment strategies. While some may reduce their workforce or turn to automation, outsourcing offers a practical and effective solution to manage costs while maintaining operational efficiency. By embracing outsourcing and other strategic adjustments, SMEs can navigate this period of financial strain and position themselves for sustainable growth in the years ahead.
To discuss how outsourcing your payroll and bookkeeping could help reduce your overheads contact our team.