Recent rises in employers’ National Insurance contributions and the national minimum wage have left businesses with very little room to pursue growth and innovation plans.
The latest Office for National Statistics (ONS) figures released this week (13 May) shows that UK payrolled employees decreased by 47,000 between February and March this year. It fell by 63,000 in the year to March 2025.
Suren Thiru, ICAEW’s Economics Director, puts this down to rising employment costs. “Cracks in the labour market are widening as the double whammy of rising National Insurance and National Living Wage hit employers, exacerbated by elevated global uncertainty. ”
A plunge in sentiment across all sectors in Q4 last year was one of the main concerns uncovered in ICAEW’s Business Confidence Monitor (BCM) of January this year. Against that backdrop, the BCM suggested that companies were worried about their prospects for the year ahead, following policy shifts such as the rise in employers’ National Insurance contributions (NICs).
One of the most controversial changes announced in the autumn Budget, the increase left businesses with a quandary: while hiring new blood is vital for innovation and growth, it now comes with added costs.
Some members in practice have struggled with the impacts of both the NICs increase and the parallel rise in the national minimum wage (NMW). One gave the example of a small takeaway shop that employs a few local people. The only way for the shop to raise enough revenue to meet those increased employment costs is to raise the price of the food. That causes its own issues; the shop is less competitive on price and is pushed further towards the VAT threshold – potentially pushing prices up further. So the owners are debating whether they can absorb some of the costs and ultimately take a hit to their profits.
A crumbling pipeline?
Tally Workspace co-founder Laura Beales says that her business has taken to outsourcing lower-paid roles. “One of our customer service staff has just left and we’re rehiring in South Africa,” she explains. “Out of a company of 14, two of us will be based over there – and both of those roles are entry level. So, I do think there’s going to be a fundamental problem with the UK’s early-stage talent pipeline. NMW and NICs were challenging for small businesses before but now it’s really tough.”
Chris Cowling, Commercial Director at renewables specialists Ineco Energy, has similar concerns. A previous employer saw hiring apprentices as an effective way to make money through the company’s workshop. However, their progress had to be carefully managed. In the first year, they were not yet up to speed. In the second, they were just about breaking even. Only in the third did they become profitable. “We did it because it was the right thing to do for the industry,” he says. “That was five or six years ago. But now, at £21,000 per year, can you really see them paying for themselves?”
Other members agree that the UK is not an easy place to bring people through apprenticeships. One firm said the Level 7 apprenticeship funding enabled them to put more students through the ACA qualification than they previously could. Some practices are
debating whether to take on as many trainees as that funding may be taken away. It’s a challenge that may hinder growth, one member said. With a small, 20-person team, those costs could have a big impact on their future hiring policies.
Wriggle room
Chartered accountant and business coach Della Hudson FCA warns that mounting costs have become the last straw for many of the owners she advises. “Businesses have limped through COVID, they’ve borrowed cash and used up savings to stay afloat – but keep getting hit in the face with cost, cost, cost,” she says. “Now, on top of ongoing expenses such as fuel, they’re facing the NMW and NICs rises.”
As a result, many of Hudson’s clients are opting to wind up. “They’ve just had enough,” she notes. “Some are retiring and taking their pot of gold with them, which is nice. But lots of them are winding up with outstanding bounce-back loans, which I must stress were taken out for the right reasons. They were used in the business, but the owners are unable to repay them. So, they’re now having to go through the insolvency process.”
Meanwhile, clients who are still eager to grow are delaying recruitment.
For technology entrepreneur Tanuvi Ethunandan, the NICs rise has prompted a mindset shift among business owners in her sector that is at odds with the typical time frames associated with tech innovation. “Tech start-ups need wriggle room on their balance sheets that will enable them to try out new things,” she says. “While they’d love to see efficiencies from those innovations on day one, in reality there are always big learning curves and adjustments. So, efficiencies only start coming through in year three or four. But the rise in NICs has made entrepreneurs take a more short-term view. That can be quite damaging for long-term growth.”
A Big Four tax specialist who wishes to remain anonymous tells Insights that the NICs rise has made it harder for employers to bring people off benefits into work, invest in upskilling existing staff or retrain those who are looking to re-enter the workforce after short- or long-term absences. “I would reduce the NICs tax because it’s not progressive,” the specialist says. “I would go for something more progressive like tax on profits, or special taxes on certain industries. But right now, we’re taxing the tax base.”
