With Labour’s potential changes to National Insurance Contributions (NICs) in October 2024, UK businesses are preparing for financial impacts. If employer NIC rates rise, the additional costs will significantly affect payroll, hiring practices, and the overall economy.
Rising Payroll Costs for Businesses
At present, employer NICs stand at 13.8% on employee earnings above a threshold. A hike would mean businesses pay more per employee, significantly increasing payroll costs. For labour-intensive sectors—like hospitality, retail, and construction—this could create a financial strain as employee numbers are high, and margins are typically slim.
The UK Chancellor warned that there would be a necessity to increase taxes and cut down on public spending due to an apparent £22bn deficit inherited from the previous Conservative government.
Small and medium-sized enterprises (SMEs) would likely feel this the most. Operating with fewer resources than large corporations, SMEs would struggle to absorb the extra costs, potentially leading to reduced profitability. In some cases, these businesses might have to cut jobs or restrict hiring to manage the financial burden. This is particularly concerning for smaller firms, as they contribute to a large proportion of employment in the UK.
Example Scenario: A business with 100 employees paying salaries around the NIC threshold would see a substantial increase in its overall payroll expenditure, which would have to be budgeted carefully. Larger corporations may have the flexibility to shift funds, but SMEs might face the difficult choice between reducing staff numbers or holding back investment in growth.
Hiring Freezes and Workforce Reduction
Higher NICs could discourage businesses from hiring new employees, leading to hiring freezes. Businesses might delay workforce expansion or even reduce existing headcounts to manage the financial hit. The UK's job market, which is already dealing with inflationary pressures and post-Brexit challenges, could experience a slowdown in job creation.
Moreover, the impact of reduced hiring would not only affect business operations but also contribute to lower consumer confidence. Fewer jobs could lead to a reduction in disposable income, further influencing economic growth. For industries that rely heavily on seasonal workers—such as retail or agriculture—the increased costs could force businesses to limit hiring or turn to part-time or freelance labour, which may not attract the same tax obligations.
Wage Stagnation and Reduced Benefits
Wage growth could stagnate in response to higher NICs. In sectors where businesses operate on tight profit margins, companies may pass the increased tax burden on to employees by freezing or reducing wage growth. Employees in sectors with lower average wages could see fewer raises, and businesses may limit bonuses or other financial incentives to offset the increased NICs.
Moreover, businesses might cut back on non-wage benefits, such as health benefits, pension contributions or additional employee perks. While these changes could help manage payroll costs, they could also reduce employee morale and make it harder for companies to retain talent in competitive markets.
Jamie Jenkins of Royal London added: “Some employers may reconsider the pension offering if they feel they need to make savings elsewhere, or they may simply absorb the change and pass on the extra cost through reduced salary increases in future.”
Tom Selby, of pension advisers AJ Bell, said: “They could adjust remuneration deals, for example by scaling back pay awards or reducing pension contributions, or both. Contracts may prevent immediate reductions in pension contributions, but you’d naturally expect firms to review the generosity of pension arrangements if the cost of those arrangements became more expensive.”
Automation and Outsourcing as Cost-Saving Measures
Many businesses may turn to automation to reduce labour costs. By investing in technologies that streamline production, services, or administration, companies could reduce their dependency on a large human workforce, thereby limiting their exposure to increased NIC costs. For instance, in the retail industry, we may see a continued shift towards self-checkout kiosks and automated inventory management systems.
Additionally, outsourcing to freelancers or offshoring could become more common. UK companies may look to international markets where labour costs are lower, and NIC obligations don’t apply. This trend could extend to roles such as customer support, IT services, and even manufacturing.
Example: Companies in the tech sector might outsource software development or customer service operations to countries with lower employment costs, ensuring they stay competitive in a global marketplace while reducing their exposure to rising domestic payroll expenses.
Sector-Specific Challenges
Different industries will experience the NIC hike in varied ways:
Labour-Intensive Sectors: Industries like hospitality, construction, and retail rely heavily on human labour and will face the most significant payroll increases. In these sectors, the cost burden might lead to reduced staff hours, increased job insecurity, and slower wage growth.
Tech and Financial Services: While often more resilient, these sectors may scale back on innovation, research, and development (R&D). The increased NIC costs could divert funds from investments in technology or product development, affecting long-term competitiveness.
Public Sector and Non-profits: For organisations that already operate on limited budgets, an NIC increase could result in service cuts or hiring freezes. Non-profits, which often rely on donations and grants, would struggle to adjust without impacting the services they offer.
Long-Term Economic Effects
The wider economic impact of NIC hikes could be far-reaching. In the short term, businesses may increase prices to offset higher payroll costs, passing the burden on to consumers. Over time, this could lead to higher inflation, reducing consumer spending and potentially slowing economic growth.
For small businesses, which are vital to the UK's entrepreneurial ecosystem, an NIC hike might discourage risk-taking and new ventures. This could lead to a reduction in innovation, fewer startups, and a slower rate of business creation.
Additionally, the effects could ripple through the supply chain, as larger companies cut costs or pass on expenses to suppliers. This would create a challenging environment for smaller firms that rely on contracts with larger corporations.
Mitigating Factors and Potential Policy Offsets
While Labour’s proposed hike would certainly increase NIC obligations, businesses could benefit from other Labour policies aimed at supporting economic growth. Potential tax credits for innovation, investment in green technology, and support for job creation might help soften the blow for businesses.
Additionally, targeted relief for SMEs, grants for adopting automation technologies, and subsidies for R&D could encourage businesses to adapt without facing unsustainable financial pressure.
Conclusion
The potential National Insurance hike in October 2024 presents a range of challenges for UK businesses. Increased payroll costs will have the most direct impact, particularly on labour-intensive sectors and small businesses. As businesses face higher employment costs, they may resort to hiring freezes, wage stagnation, and automation to remain profitable.
However, with careful planning and strategic adaptation, businesses can navigate these changes, balancing short-term costs with long-term growth. Whether through automation, outsourcing, or shifting investment priorities, businesses will need to find innovative solutions to thrive in this evolving economic landscape.
Can Borderless help?
Using Borderless Payroll can help companies navigate potential National Insurance hikes by providing comprehensive payroll outsourcing services. This includes managing payroll calculations, ensuring compliance with the latest tax regulations, and handling employee benefits efficiently.
By outsourcing payroll, businesses can focus on their core operations while reducing the administrative burden associated with increased costs. Additionally, Borderless Payroll can help identify cost-saving opportunities and provide insights into optimizing workforce management, ensuring that companies remain competitive even in a challenging financial environment.
About the author
This is an opinion piece from some of our team members at Borderless. Please look at the situation yourself and make your own judgements. Seek professional advice with everything related to employment law and taxation, and what it will mean for your business.