The NI squeeze: what the government’s tax hike means for you and your clients

How will the hike in employer National Insurance (NI) hit the UK’s already struggling SMEs? As Labour's first budget introduces a 1.2 percentage point increase in employer contributions, accountants face tough conversations with clients about survival – while wrestling with their own rising costs.

by | 24 Jan, 2024


At a glance

  • Employer NI jump to 15% threatens to trigger hiring freezes, training cuts and wage stagnation 
  • The employment allowance increase to £10,500 offers some relief but may not fully offset costs
  • High staffing sectors like retail, hospitality and care face the greatest pressure on already thin margins

Chancellor Rachel Reeves’ maiden budget delivered a clear message: employer NI would rise from 13.8% to 15% as part of the government’s strategy to shore up public finances and boost funding for essential services like health and social care. 

Expected to raise £25 billion annually for the public purse, the move was framed as a necessary measure to support economic stability. But Steph Gemson, Founder at TaxGem, says the policy will place an additional cost burden on SMEs, which make up nearly 60% of the UK workforce, and are already battling economic headwinds, supply chain disruption and the rising cost of living.

Headshot of Steph Gemson
Steph Gemson, Founder, TaxGem

“Most businesses with payroll costs above the new Employment Allowance (£10,500 from April 2025) will feel the impact of this increase,” she says.

“While larger corporations may absorb the costs more easily, small businesses—especially those in sectors with high staffing costs, such as hospitality, retail, and care services—will be disproportionately affected. These businesses often operate on tight margins, meaning even a small increase in employer NI can strain cash flow.”

Who bears the burden?

Experts agree the employer NI increase will hit hardest where businesses can least afford it. Early-stage companies and growth-focused SMEs are particularly at risk: they need talent to scale but now face higher costs for every new hire and don’t have the cushion of large profit margins to fall back on.

Chris Eastwood, CEO at Penfold Pensions, warns labour intensive organisations with fixed budgets and less flexibility are also likely to be hit hard.

“Organisations employing low-wage workers will see the biggest relative cost increase due to the reduced threshold, and the public and nonprofit sectors including schools, healthcare organisations and charities, may also face challenges adapting to the increase,” he says.

This financial pressure coincides with April’s National Minimum Wage increase, creating a tough year ahead for businesses already struggling with staffing costs. Many SMEs are now weighing difficult decisions: slowing recruitment, freezing wages or even considering redundancies.

Headshot of Chris Eastwood
Chris Eastwood, CEO, Penfold Pensions

“There’s also a risk that some businesses may cut back on training, apprenticeship schemes, or employee benefits to offset the expense. For companies already struggling with recruitment and retention, this could further weaken their ability to attract top talent,” Gemson says.

For sectors like hospitality and retail, where the Centre for Policy Studies data shows more than a fifth of the amount businesses spend on staff will now be swallowed up in taxes, the combined impact of the employer NI increase and wage pressures could force fundamental changes to business models, from reduced opening hours to increased automation.

Strategies for survival

If you’re an employer, it’s worth exploring your options to help your practice and your clients stay competitive before the increase comes into effect. The impact mitigation toolbox includes both immediate tactical moves and longer-term strategic shifts.

Optimise payroll and manage cash flow

  • Review workforce planning and explore flexible staffing options, including freelance and contract arrangements
  • Optimise use of the increased £10,500 employment allowance
  • Investigate R&D tax credits and other available relief
  • Consider increasing pricing where market conditions allow

Enhance operational efficiency to maintain profitability

  • Invest in automation and technology to reduce labour-intensive tasks
  • Review and streamline processes to boost productivity
  • Assess working patterns to optimise staffing costs
  • Explore flexible working arrangements to reduce overhead

Forecast strategically

  • Build employer NI increases into future financial forecasts
  • Review business models and revenue streams
  • Consider restructuring options to improve tax efficiency

Exploring salary sacrifice schemes can also help reduce employer NI liabilities, Eastwood notes.

“This arrangement reduces the employee’s taxable salary, leading to savings on both employee and employer NI contributions. For employers this can be hugely beneficial – by lowering the gross salary through salary sacrifice, employers decrease the amount subject to NI, thereby reducing their overall NI liability,” he says. 

“It can also be helpful in overall cost management…and help offset the increased costs due to the NI rate hike and threshold reduction.” 

The key is developing a balanced strategy that works for you and/or your clients’ specific circumstances. While some may be able to absorb costs through pricing adjustments, others will need to focus on efficiency gains or structural changes.

Time to act

The NI hike is coming whether businesses like it or not, forcing fundamental conversations about how UK businesses operate in 2025. Accounting professionals and employers who engage deeply with the strategic implications now, rather than just the technical details, will prove invaluable client partners in navigating what looks to be an increasingly complex tax landscape ahead.


Information on the IFA’s Future proofing your practice series can be found here

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