Managing rising costs is a top priority for business owners. An increase in the outlays required to run your business will naturally affect the price you charge for your goods and services, what you are able to pay your team if you employ staff, and of course the wealth you are able to withdraw from your company.
As a result, it is vital to be aware of key tax changes that could drive up the running costs for your business. Crucially, one of these changes is set to come into place for the 2025/26 tax year.
Rates of employer National Insurance will rise by 1.2 percentage points from 6 April 2025
As announced by the chancellor during the Autumn Budget in October, there will be a 1.2 percentage point National Insurance (NI) increase for employer contributions starting from 6 April 2025.
This will see the secondary Class 1 rate of National Insurance contributions (NICs) paid by employers increase from 13.8% to 15%.
Additionally, the threshold at which employers start paying these NICs will reduce from £9,100 to £5,000 a year. It will remain at this level until 6 April 2028, at which point it will then begin to increase with the Consumer Prices Index (CPI) moving forward.
According to the government, these reforms will raise £25 billion a year by 2029/30, which is the end of the forecast period.
However, these changes could also significantly increase costs within your business. Indeed, according to the Centre for Policy Studies, the NI increase will lead to a 60% increase in the tax bill for businesses that employ the lowest paid.
For example, in 2024, an employee earning the minimum wage and working a 35-hour week costs a business £1,617 in NICs. From April 2025, this will increase to £2,583.
Meanwhile, figures from the Office for Budget Responsibility (OBR) suggest that in total, the changes will add 2% to overall payroll costs for employers. While that sounds like a small figure in of itself, it is quite a notable increase to happen overnight.
There is some relief for businesses, in that the Employment Allowance, which offers a discount on employer NI bills, is also increasing.
In 2024/25, the Employment Allowance allows employers to reduce their annual NI bill by up to £5,000. From April 2025, this will increase to £10,500. Furthermore, the government is removing the eligibility cap of £100,000, which currently means you cannot benefit from the Employment Allowance if your NI bill in the previous tax year was £100,000 or more.
The government says these changes will mean 865,000 businesses pay no NICs at all in 2025/26.
If you are included in this category, then this is good news, as it means the increase in rates may not affect you at all.
However, if you are not, you may encounter the increased costs described above. As a result, you may need to find ways to manage this increase in your outgoings.
So, read on to discover three options you might have for doing exactly that.
1. Look at cost-cutting measures across your business
Initially, looking for areas where you can cut costs across your business can be a sensible starting point.
For example, you could consider implementing changes such as:
- Encouraging remote working to reduce the cost of operating a physical workspace
- Speaking to suppliers and seeing whether you can renegotiate your current deals
- Using available data such as that collected from forecasting tools to accurately assess spending and identify areas where you could make cost savings.
You may also want to consider whether there are savings to be made in staffing. That does not necessarily mean letting go of your key people, but rather considering whether there are areas where you could cut back.
As reported by Reuters, a survey of more than 2,000 British businesses conducted by the Bank of England (BoE) discovered that this is exactly what UK firms plan to focus on this year. The research revealed that of those businesses:
- 53% expected lower employment
- 39% intended smaller pay rises.
You could consider avenues like this, as they could result in significant savings for your company.
It is vital to ensure that you correctly communicate decisions like these to your team. Otherwise, they may be disappointed to discover that they will not be getting additional support in their department, or as much as they expected from a scheduled pay rise.
2. Increase the prices you charge customers and clients
If your processes and spending patterns are already as optimised as they can be, the next most logical place to look is the pricing of your product or service.
The BoE research referenced above found that more than half of surveyed businesses (54%) planned to raise prices this year to cope with the NI rise. So, you would likely be far from alone if you were to employ this strategy.
As the OBR figures suggest that the total cost of the NI increase could be around 2% for employers, you could consider increasing your prices by an equivalent amount to offset the rises entirely.
Of course, with a decision like this, it is crucial to include the potential for lost customers or clients in your calculation. If you lose too many of your clientele by doing this, you may end up worse off than if you had not increased prices at all.
Make sure you factor this is in when deciding how much you raise prices by if you want to go down this route.
3. Offer your employees a salary sacrifice scheme
Rather than stopping employment or reducing pay rises, you could consider implementing a salary sacrifice scheme in your business.
In these schemes, you can offer your employees the opportunity to reduce their salary in exchange for a benefit, typically with no cash value.
Under this government-backed initiative, there are certain benefits that you can give your employees without them incurring an additional tax bill for it being a benefit in kind. Most notably, this includes pension contributions.
As this would result in a reduction in salary that is subject to NICs, you could reduce the impact of the increase while your employees can maintain their effective compensation.
Read more: How salary sacrifice can benefit your business and your employees
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Are you a business owner in need of support managing your wealth? Please do get in touch with us at DBL Asset Management.
Email enquiries@dbl-am.com or call 01625 529 499 to speak to us today.
Please note
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
