At a glance
- Government lowers National Insurance threshold and increased rate
- Small businesses will see costs rise and finances stretched as a result
- Unable to justify pay rises, how can leaders retain talent in their place?
In October’s Budget, the Government announced that it would decrease the National Insurance Contributions (NICs) Secondary Threshold from £9,100 to £5,000 per year, whilst raising the rate to 15% from 13.8%. This means employers will have to begin paying NICs on more of their employees’ earnings.
The NICs changes will be challenging for UK small businesses that are already under pressure, with the Office for Budget Responsibility (OBR) estimating that the changes will add 2% to payroll costs. Many businesses will struggle to cover these extra costs, leading to stagnant wages and issues retaining employees.
For Paul Foley, Managing Director of EB Now, an employee benefits company focused on supporting SMEs, the last resort for most small businesses is laying off employees. Instead, they’re asking, “How can I retain my team while managing the books this year?”
With the new rules set to come into effect from 6 April, we spoke to Foley about how small businesses can navigate the challenges ahead.
Salary sacrifice
For Foley, small businesses should be looking at salary sacrifice options. This is the exchange of part of employees’ salary for benefits such as an electric or low-emissions vehicle, Cycle to Work, or home and electric goods. Businesses can offset the cost of these goods against corporation tax by claiming them as deductible business expenses.
Salary sacrifice can make large purchases more affordable for employees.
Foley says: “There is a serious net benefit. For example, one scenario might be that you sacrifice £300 a month from your gross salary – but in real terms it would only cost you about £200 net because of the tax saving.”
Another salary sacrifice route is a pension review, which allows employers to increase their contributions to the employee’s pension rather than adding to their salary.
Rewards and benefits
Employers can consider offering employees rewards to offset the NICs and income tax they need to pay. One example is through retail discounts and perks, which can give employees savings on everyday expenses such as their weekly food shop or household necessities.
The financial benefit can be considerable – Foley says: “They could save as much as £900 a year, which is £1,500 gross salary in real terms.”
Foley notes that it’s important to ensure employees know how these schemes work, and feel empowered to use them. He adds: “I think employees are as conscious of the challenges their SME employers are facing as the employers themselves are right now. In isolation it’s never going to convince someone that they don’t need to have their pay rise, but it just helps in the round of trying to reduce tax on salary.”
Apprenticeship funding
Some small businesses may want to offer employees apprenticeship opportunities in place of a salary increase. This could include anyone looking for personal development, not just the traditional apprentice profile.
Foley says: “When we say apprenticeship, we’re talking about someone who’s working with you already. They’re on your books. They might be 30. It doesn’t matter, but you’re going to support them in that personal development. And some of those may be grant aided or match funded by government.”
Various government bodies offer apprenticeship grants, with offers differing on a regional and industry basis. Often grants are available to businesses looking to gain new skills in specific sectors like technology or manufacturing.
“Employers would usually have been looking at how they can do more for their people, but the driving force right now is how they can keep their people and manage the books this year.”
Paul Foley, Managing Director, EB Now
Investment in training and development
Another valuable way for small business owners to retain talent is by offering training programmes for employees to develop new skills and advance their careers. The costs associated with employee training are tax deductible as a business expense, as training to meet specific qualifications or certifications can be eligible for a NICs reduction.
Proactive investment in employees’ career development can help foster a sense of loyalty to the company. Foley says: “If you’re investing in your people and they are increasing their skills and capability, then they may feel rewarded by having this option. It’s not always going to be right for everybody, but it’s another personal development offer which will excite and delight that employee.”
Digital transformation
Foley notes that many SMEs have existing plans, such as opening a new site or launching a new product, that rely on people to implement. With NICs changes forcing many small businesses to halt recruitment, retaining current talent is even more important.
Many small businesses looking at their books in terms of the NICs changes may not feel able to recruit this year, and this is where digital technologies and artificial intelligence (AI) come in. Using AI for routine tasks can reduce the need for extra manpower, and fewer new recruits means less NICs to pay.
For Foley, the changes are “definitely the hot topic now”. “Employers would usually have been looking at how they can do more for their people, but the driving force right now is how they can keep their people and manage the books this year,” he says.
To navigate the change successfully, small businesses need to act now. “Inflation is a big issue, and small businesses will face increased costs if they stand still. First movers may see a short-term advantage, but they need to be thinking longer term. This isn’t going away.”
More information on IFA’s Future Proofing your Practice webinar series here.
