If you run a business in the UK, there’s no escaping the fact that your employment costs are about to rise. From 6 April 2025, the government is introducing National Insurance changes that will see Employers’ NI contributions rise – hitting small and medium businesses the hardest.
This isn’t just another routine tax tweak – it’s a structural shift that will push up employment costs, force businesses to rethink hiring, and, for some, put profitability at risk. But with the right strategy, businesses can absorb the impact without stalling growth.
Let’s break down what’s happening, why it’s happening, and – most importantly – what you can do about it.
What’s Changing?
There are two major changes that businesses need to prepare for¹:
| Old Rate/Threshold | New Rate/Threshold | |
| Employer NI contribution rate | 13.8% | 15% |
| Earnings threshold for employer NI | £9,100 per year | £5,000 per year |
This means two things:
- You’ll be paying more NI per employee. For example, if someone earns £35,000 a year, your annual NI bill for them will rise by about £926.
- The lower threshold means more employees will qualify for NI contributions, even those in part-time or lower-paid roles.
There’s a small silver lining: the Employment Allowance (which reduces NI costs for small businesses) is increasing from £5,000 to £10,500, and the £100,000 cap for eligibility is being removed.2 In other words, more businesses can claim it, but for many, it won’t be enough to fully offset the cost increase.
Why Is This Happening?
The government says the NI hike is necessary to repair public finances, which Chancellor Rachel Reeves claims were left with a £22 billion shortfall by the previous administration.3 Labour has long argued that those with the “broadest shoulders” should contribute more, and raising employer NI, one of the biggest revenue-raising measures in this budget,is part of that plan to support public services and stabilise the economy.
Economically, it’s a strategic move – instead of increasing personal income tax (which would directly impact workers), the government is targeting employers instead. The logic is that companies can absorb the cost better than individuals.
Businesses don’t just swallow rising costs – they find ways to pass them on, whether through price hikes, hiring freezes, or tighter budgets. This is why many are already considering price increases, salary freezes, or hiring slowdowns.4 And if enough companies adjust their strategies in this way, the knock-on effects could be higher inflation and slower job creation.
How Will This Affect Businesses?
For small and medium businesses, this increase will reverberate through every financial decision.
Higher Employment Costs
If you’re running a restaurant, a retail shop, or a care home, where margins are already tight, this extra tax burden could be the difference between profit and loss. Even for businesses in professional services, where wages are higher, the cumulative impact of NI increases across all employees is significant.
Hiring, Wages, and Retention Challenges
Recruitment is already taking a hit. In fact, some businesses have already said they’ll rethink hiring plans entirely. A British Chambers of Commerce (BCC) survey found that 82% of UK companies are reviewing their operations due to rising tax costs, with 58% expecting a direct impact on hiring.5
On the employee side, salary freezes might become more common, with businesses opting for one-off bonuses instead of permanent pay increases to control NI liabilities.
Price Increases and Inflation Risks
Many companies won’t absorb the cost – they’ll pass it on. A survey by the British Retail Consortium found that two-thirds of retailers plan to raise prices in response to the NI increase.6 This creates a ripple effect: as more businesses increase prices, inflation pressures rise, affecting consumers and businesses alike.
The Automation and Outsourcing Trend
We’re likely to see more businesses investing in automation, from self-checkouts in retail to AI-driven admin support in offices. Outsourcing (both domestically and internationally) could also increase as companies rethink the cost of in-house employment.
The Risk of Business Closures
For companies already on tight margins, this could be the final straw. Sectors like hospitality, social care, and manufacturing, where labour costs are a major factor, will be the hardest hit. The Times reports that the manufacturing sector experienced a decline in output in the first quarter of 2025, attributed to global trade tensions and increased business taxes, including the NI hike.7 This downturn has led to reduced hiring plans and concerns about job losses.
How Can Businesses Prepare?
If this all sounds like bad news, don’t panic. There are ways to mitigate the impact, but you need to start planning now.
1. Rethink Your Workforce Strategy
With employer NI on the rise, many businesses are looking for ways to keep staff happy without pushing up their tax liabilities.
One effective approach has been the introduction of non-cash benefits. According to Moore Kingston Smith, offering additional paid time off, flexible working hours, and wellbeing programmes can boost morale and improve productivity, helping to retain employees without increasing the employer NI burden.8
Moreover, the concept of a four-day workweek is gaining traction as a means to enhance employee satisfaction and productivity. A government-backed trial involving 17 businesses and 1,000 UK workers is set to explore this model, with participants adopting various reduced working hour arrangements.9
Additionally, initiatives like Joe Wicks’ “movement hour,” which allows employees an hour off daily for physical activity, are being implemented to promote wellbeing and work-life balance. Wicks plans to promote this initiative by visiting workplaces to address the importance of well-being, with over 600 companies having signed up for his initiative.10
These innovative strategies reflect a broader trend among UK businesses to offer creative, non-monetary benefits that enhance employee satisfaction and retention without incurring additional NI costs.
Others are encouraging overtime rather than hiring new employees, so they can maximise productivity without increasing headcount.
And then there’s the growing trend of using more freelancers and contractors, since they’re not subject to the same NI rules. Another option worth exploring is hiring students or apprentices, as certain categories can attract lower National Insurance liabilities. For example, employers don’t have to pay Class 1 NI contributions for employees under 21, apprentices under 25, or students working during holiday periods, provided their earnings stay below the relevant thresholds.11 This can offer a cost-effective way to bring in emerging talent while reducing your NI exposure.
2. Maximise Tax Reliefs
Claiming the £10,500 Employment Allowance is a must for small businesses. Also, consider salary sacrifice schemes, where employees exchange part of their salary for non-cash benefits like pension contributions, reducing both employer and employee NI liabilities.
Some businesses are also looking into employee share schemes as a way to reward staff without increasing NI costs.12
3. Cut Unnecessary Costs
Now’s the time to audit your expenses. Some businesses are downsizing office space and going hybrid to reduce overheads. Workplace Insight reports that flexible working has enabled many businesses to reduce overheads by decreasing traditional office space and opting for flexible, localised workspaces.13 Others are renegotiating supplier contracts or investing in automation to improve efficiency.
4. Plan for the Financial Impact
Make sure your payroll software is set up for the new NI rates – otherwise, you risk miscalculations, compliance headaches, or unexpected costs. The government has outlined the updated thresholds, so now’s the time to check that your system is ready to apply them from day one.
More importantly, make sure you’ve got a handle on your cash flow before the higher NI payments start kicking in. Running the numbers now means you won’t be scrambling to cover unexpected costs later.
The Cost of Employment Is Changing – How Will You Respond?
The 2025 National Insurance changes are unavoidable, but how businesses respond will determine their future. Some will struggle, while others adapt – through automation, smarter hiring, or restructuring pay. Those who plan now will have the edge.
So, what’s your move? Cutting costs? Investing in automation? Because standing still isn’t an option.
Sources:
1. GOV.UK, Changes to the Class 1 National Insurance Contributions Secondary Threshold, the Secondary Class 1 National Insurance contributions rate, and the Employment Allowance from 6 April 2025 – November, 2024
2. GOV.UK, Changes to the Class 1 National Insurance Contributions Secondary Threshold, the Secondary Class 1 National Insurance contributions rate, and the Employment Allowance from 6 April 2025 – November, 2024
3. Reuters.com, UK Chancellor Rachel Reeves raises employers’ National Insurance Contributions – October, 2024
4. The Times, UK employers to axe jobs as costs rise after the budget – February, 2025
5. Business Matters, Most UK businesses to ‘rethink their plans’ as tax rise takes toll – February, 2025
6. British Retail Consortium, National Insurance increase will force retailers to raise prices – January, 2025
7. The Times, ‘Ominous’ sign as UK manufacturing output falls in first quarter – March, 2025
8. Moore Kingston Smith, Managing the increase to employer national insurance contributions – February, 2025
9. The Guardian, One thousand UK workers to join first four-day week trial under Labour – November, 2024
10. The Times, Joe Wicks’ next mission: giving workers a ‘movement hour’ every day – February, 2025
11. GOV.UK, Employer National Insurance contributions for under 21s – December, 2014
12. GOV.UK, Tax and Employee Share Schemes – Undated
13. Workplace Insight, Hybrid working businesses say they are more optimistic about their future profitability – February, 2025
