As the dust settles on the latest UK budget, you will now likely be thinking about how to deal with the employee related changes. As a quick recap these are, and effective from April 2025, as follows:
- 1.2% increase in the rate of Employers National Insurance to 15.0%
- Reduced threshold at which Employers National Insurance becomes payable (contributions now starting at £5,000 rather than £9,100)
- Increase in annual Employers Allowance from £5,000 per annum to £10,500 (assuming your business meets the qualifying criteria)
- Increase in the national minimum wage to £12.21 per hour.
So, your decision now, therefore, is how to incorporate these changes into your 2025 planning. Should you absorb these costs as a company, or adjust employee pay increases to mitigate the impact? Reading the immediate headlines it would appear that the answer is relatively simple:
“UK business owners reacted with fury to a £25bn tax raid yesterday amid fears it will cost jobs, lower salaries and push prices up for customers”
Are these options the only way to go?
However, I would caution on knee-jerk reactions such as this. And in particular, I would recommend taking a wider view on what these changes mean for your business, rather than making a simple, binary connection that changes to wages-related taxes can only be solved via wages-related decisions. This is a great example of why focusing too narrowly or short-term could create larger, more complex problems down the line. Here’s a closer look at why balancing both cost and culture might be your best long-term strategy.
You could make a choice to protect existing profit margins over anything else, which would mean passing this new cost on to your employees. Whilst the increase is a business cost and not directly borne by the employee, you could seek to offset this via a direct reduction or cancellation of pay rises, reduced bonus or commission structures or more indirectly via reduced budgets on employee benefits or education and training packages. In the short term, it would appear the problem is solved: an increase in employer NIC is offset by a reduction in another line of your budget, creating nil financial impact.
This could / will, however, lead to real consequences tomorrow. Consider the message to your staff if you announce a decision to freeze or squeeze pay increases, especially as many continue to feel the pinch of rising living costs. This could seriously harm employee morale, and consequently productivity and eventually impact top-line revenues. Employees see annual raises not only as an expectation but also as a sign that their work is valued and their loyalty rewarded. Holding back pay increases or other benefits to counterbalance the employers NIC cost risks fostering resentment.
Unhappy employees, particularly in a competitive labour market offering better salaries if you freeze yours, may begin looking elsewhere, leaving employers to deal with high turnover and, ironically, increased recruitment and training costs. Remember that it is estimated that the cost to replace an employee is 3 to 4 times the monthly salary.
Further, beyond direct financial impact, the culture impacts can also be significant. Retaining great employees in your business isn’t just about their take home pay; it’s about maintaining a work environment that values growth, fairness, and transparency. A company that holds back raises or compromises its benefits package may soon find itself struggling to attract new talent and keep morale high. Your overarching brand, mission and core values should stand strong at this time.
The power of honesty and transparency goes a long way
I believe, therefore, that the key to navigating this week’s budget changes without compromising employee satisfaction or company culture is to take a measured and balanced approach. Consider looking for efficiencies in other areas of the business rather than automatically turning to pay adjustments. From streamlining processes to rethinking certain expenditures, there may be ways to reallocate resources without directly impacting staff.
Furthermore, be open and transparent as this will create confidence and faith with your employees and will go a long way. If the increased costs announced in the budget is a significant challenge, tell your employees that in a way that’s both honest and reassuring. Showing that you value their role in the company and are working to minimise the impact on them can foster a culture of trust and resilience. And of course, it goes without saying, please reach out to Nuvem9 for help in understanding the specific costs and impacts for your 2025 forecasts.
This week’s announcements should serve as a reminder to always think holistically. Balancing today’s needs without compromising tomorrow’s growth, and maintaining a positive, resilient company culture, will put your business on stronger footing for whatever lies ahead. This approach will frame the changes into a strategic decision for you as the business owner, and help you see the broader impact on culture, morale, and competitiveness.
Main Image Credit: Jakub Żerdzicki
Helping leaders and businesses drive success forward
Here at Nuvem9, we do things a bit differently – we’re not your traditional accountants or financial advisors.
We utilise our knowledge, years of hands on experience and expertise with technology and a proactive approach to leverage the best support for you that spans your whole business. So whether you’re in need of an outsourced bookkeeping or accounting team, help to scale up your business or planning for an exit, we’re here to support you each step of the way.
Get in touch for a free no obligation chat with one of our Senior Advisors to explore how we can support your accounting, financial planning and business strategy.
