Employers’ National Insurance: How 2025 rise will affect businesses and what do to now

In April 2025, employers’ National Insurance contribution (NIC) rates will rise, impacting staff costs, cash flow and margins for many small and medium-sized enterprises (SMEs).

Other factors are adding to their cost base too, including rising minimum wage bills, and meeting incoming employee rights requirements.

Contemplating your rising cost base may remind you of the words of Eeyore from Winnie the Pooh, who said, “Could be worse—not sure how, but it could be.”

But many resilient UK entrepreneurs are pushing such gloomy thoughts aside.

Instead, they are embracing the challenge by finding ways to offset extra costs, and even emerge stronger by pivoting or growing their way out of the problem.

In this article, we cover details on the rise of employers’ National Insurance, how it will impact your business, and what you could do to offset costs.

Here’s what we cover:

What is the employers’ National Insurance rise?

In the 2024 Autumn Budget, Chancellor Rachel Reeves announced the rate of employers’ NICs will increase from 13.8% to 15%, from April 2025.

The level at which employers start paying NICs (the secondary threshold) will also reduce from £9,100 to £5,000 per year.

To help small businesses offset the increased NIC costs, the Employment Allowance, which helps eligible employers reduce their NIC liability, will increase from £5,000 to £10,500, and the £100,000 eligibility threshold will be removed.

The impact on businesses

Not all companies will be affected. A few will actually benefit from the increased Employment Allowance.

But many others face significantly higher costs from the rising contribution rate and lower threshold.

Payroll is the biggest cost for many SMEs, so this could significantly impact their cash flow and profits.

For example, employers’ NICs for minimum wage employees will rise from £1,617 to £2,583, according to the Centre for Policy Studies. This will contribute to 2025 being the most expensive year on record for employers of minimum wage workers, it said.

The Office for Budget Responsibility (OBR) estimates that, overall, the changes will add 2% to employers’ payroll costs.

In the 2025/26 tax year, firms will pass on 60% of the higher costs to workers and consumers, via lower real wages and higher prices, and absorb 40% themselves in lower profits, it forecast.

Rowan Morrow-McDade, a tax director at Alexander & Co Chartered Accountants, says this impact on profits could significantly impact future investment for many.

“The result of these changes and strengthened employee rights could be increased redundancies,” he says.

“We know one business whose wage bill will increase by around £400,000 next year. Unfortunately, they are looking to make 20 redundancies to accommodate this.”

The consequences are also being felt among recruiters already with a large drop in advertised roles.

Independent HR consultant Emma Cromarty says a proactive approach is key—companies are not waiting until April 2025 to react.

She says: “SMEs are already thinking carefully about ways to reduce overheads through different ways of working, using technology, and other methods of delivering their services and products.

“My clients are also consulting with staff to reduce their hours or make redundancies, and looking to reduce supply chain costs and increase prices.”

Ideas on how you can offset higher costs

When planning how to offset higher costs, start by ensuring you have robust bookkeeping systems and practices, says Rowan. Smaller business owners are often so entrenched in daily activities, they do not take a step back to analyse their records, he says.

Strong financial reporting and dashboards provide timely and accurate financial information that can help you improve decision-making.

They can also help identify cash flow issues before they become a problem, and support performance evaluation, and budgeting and forecasting.

Iain Wheat, senior tax manager at UHY, warns that staff cuts should be a last resort.

This may decrease motivation among those who remain, as could freezing or reducing pay rises, leading to decreased productivity.

He advises SMEs to ensure they are operating as efficiently as possible, reviewing all your expenses for possible savings before cutting any jobs.

“Technology, including AI, offers options to reduce the workload for employees,” says Ian. “Small businesses should also explore all possible tax reliefs.”

Examples might be whether you can claim the increased Employment Allowance in April 2025, or take advantage of research and development tax credits.

Other ideas for offsetting NIC costs include:

• Introducing a salary sacrifice scheme or enhance an existing one. This can help you reduce your NIC bill by allowing employees to take lower salary in exchange for pension contributions. You can also pass some of the savings to staff if you want
• Using as many self-employed staff as possible
• Outsourcing as much as possible, for example, payroll, HR and marketing
• Looking at whether more staff can work from home, so you can downsize your workplace
• Using advanced financial forecasting tools to improve decision-making
• Introducing zero-based budgeting and data analytics to identify cost savings and growth opportunities
• Renegotiating contracts to cut supplier costs
• Pivoting away from the most affected sectors, such as hospitality, and considering expanding abroad
• Developing more flexible cost structures that can scale or reduce quickly with demand
• Training yourself and senior staff in how to navigate complex change.

HR consultant Emma also recommends asking staff for their cost-saving suggestions.

“Often they are the ones with the better ideas as they do the job day in day out,” she says.

SME reactions to the rise in employers’ National Insurance

Thomas Farquhar, co-founder of low-carbon start-up Heatio, says the NIC changes have made it increasingly difficult to plan for growth and expansion.

“It’s usually best to focus on long-term planning, but this combination of cost increases means survival requires short-term action and priority,” he says. “It means we’ve had to curtail all hiring, and started to review our cost base including existing roles, plus a likely stop to all wage growth.

“The next stage would be to increase our prices. This will take time and may not be possible across the board. But we are doing everything possible to avoid cuts and manage with our existing workforce.”

Reece Donnelly, managing director at Theatre School of Scotland, says the NIC increase will add around £60,000 annually to his company’s staff costs.

“Ultimately, this cost will need to be passed to the customer, meaning everyone loses out – families, students, and the business,” he says.

“We’ll need to suspend hiring and find ways to cover these additional costs, likely impacting growth and new initiatives. We’re also reviewing budgets and assessing staff-led, income-generating opportunities.”

Reece advises other SMEs to review budgets thoroughly and cut any costs you can, for example, by assessing whether you need all your current subscriptions.

Running a clear profit and loss (P&L) sheet can highlight areas to optimise.

“Times are tough, but remember your customers come to you for a reason,” he says. “Stay true to your vision and don’t let these challenges deter you from growing.”

Final thoughts: Finding strength in adversity

Consultant Andrew Shepperd, co-founder of Entrepreneurs Hub, says: “Even the most positive SME owners are saying ‘we need a measure of caution’ around investment decisions.

“But entrepreneurs are not like Chicken Little, waiting for the sky to fall in. Tough times force us to discover the best in ourselves to come through stronger.

“SME owners are real about the challenges. But they are creative, resilient and always looking for ways to adapt and discover new opportunities among the dark clouds.

“We see people looking to bring innovation into their business, and find new customers, products, services and niches.

“For example, they may increase their digital marketing to access new opportunities. Some have become more aggressive to win new or better quality business. Others are looking at how AI can help them improve correspondence, marketing intelligence, or contract writing for example.”

Andrew highlights how many software providers are bringing AI functionality into their core solutions for SMEs, such as accounting software and enterprise resource planning systems, to increase efficiencies.

Others are enhancing their e-commerce propositions to drive efficiencies or help SMEs reach more customers.

He points out that SMEs may even take advantage of competitors struggling with higher costs by acquiring them. Or if your business model is weaker, maybe now is the time to merge and seek safety in numbers.

“In tough times, strong companies often get stronger,” adds Andrew.

Whether you plan to take increased employers’ NICs on the chin in lower profits or find ways to offset them, proactive planning and sound accounting practices are key to remaining strong.

These will help you make the best decisions to build resilience and come out fighting in 2025.