The rising costs of employment for employers

There is no doubt about it; employers are increasingly gloomy. The forthcoming rise in employer National Insurance Contributions (NIC) and the National Minimum Wage comes on top of a run of recent increases in business costs, including frozen NIC thresholds (above which employers pay NIC) since 2022, a substantial increase in Corporation Tax rates from 2023, and increasing business rates from that same year.

From April 2025, employer NIC costs are increasing from 13.8% on salaries above £9,100 to 15% on salaries above £5,000.

At the same time, the National Living Wage is set to increase by 6.7% for over-21s (from £11.44 to £12.21) and by 16.3% for those aged 18-20 (from £8.60 to 10.00).

Tax, NIC and wage rises aside, the current Government has continued the trend of government seeking to use employers to implement and police government policy. A recent example of this is the Government’s proposals to ask employers to invest in vaccinations and medical check-ups as part of a wider health initiative.

On top of this, employers are having to grapple with increasingly complex rules which, in areas such as IR35 and employment status, are often based on evolving case law. As such, many employers are forking out more frequently for professional advice, just to remain compliant.

What can employers do?

There are no easy answers or quick fixes. For many employers, rising costs will mean tough decisions. Some employers will feel the need to pass on costs to customers with price increases; others may decide to pause new recruits. Wages could also take a hammering as employers seek to balance the books. Inevitably, there will be those employers whose only viable course of action is to reduce headcount via redundancies. Whilst employees will be thankful that the employee NIC rates (or tax) rates have not increased, this will be small consolation if jobs are lost, or employers are unable to maintain wage increases to match the cost of living.

In terms of some practical actions, some ideas for employers include:

• considering offering an HMRC-approved share scheme as a tax- and NIC-efficient alternative to cash incentives;
• making greater use of self-employed contractors (of course, where this is appropriate and compliant), saving employment costs including employer NIC;
• employing people who live and work outside the UK. Whilst this may have some unforeseen costs, depending on the country in which employees are located and the circumstances, it may save employer NIC and other employment-related costs;
• reviewing their employee benefits policy and provision to ensure that tax and NIC reliefs are being maximised. Even small reliefs which are overlooked or are mis-applied can mean significant employer NIC savings when measured over a period of years and particularly if there are many employees involved; and
• implementing a tax- and NIC-efficient pension salary sacrifice scheme.

Is there any good news?

It is not bad news for all employers. We should not forget that when it comes to small employers, the Employment Allowance is increasing from April 2025. This means that employers with total annual NIC liabilities of less than £100k will have their NIC bill reduced by up to £10,500 per annum. As such, many smaller employers will not be affected by the increases and may pay less or pay no NIC at all.

As with all changes, the burden of rising costs will fall unevenly on employers, with certain labour-intensive sectors such as retail and construction likely to feel the squeeze more acutely.

Unfortunately, without any apparent let-up on the horizon from the Government, employers across all sectors will need to give more thought than ever when it comes to managing employment costs.

If you have questions or concerns about employment tax for UK employees or globally mobile employees, please contact Lee McIntyre-Hamilton.