National Minimum Wage and NIC increases — how to navigate rising employer costs

The recent reforms to the National Minimum Wage (NMW) and National Insurance Contributions (NICs) present significant challenges and opportunities for businesses. 

Here, experienced employment lawyer Nick Campbell explores how these reforms will impact businesses and shares proactive steps that employers can take to mitigate costs and reorganise their operations where necessary.

Understanding the reforms to National Minimum Wage and National Insurance Contributions

National Minimum Wage — 1 April 2025

From 1 April 2025, the National Minimum Wage increased substantially across all age groups. The National Living Wage (NLW) for workers aged 21 and over has risen to £12.21 per hour, a 6.7% increase. For younger workers, the increases are even more pronounced. The rate for 18 to 20 year-olds jumped to £10.00 per hour — a 16.3% increase — and for those under 18, the rate has risen to £7.55 per hour, an 18% increase. These changes aim to improve living standards and reduce wage inequality. However, they also impose higher payroll costs on employers, necessitating careful financial planning and adjustments to employment contracts and HR strategy to ensure compliance.

National Insurance Contributions — 6 April 2025

The reforms to NICs include an increase in the employer contribution rate from 13.8% to 15% and a reduction in the secondary threshold from £9,100 to £5,000 per annum. This means that businesses must start paying NICs on lower earnings, significantly increasing their financial burden. The Employment Allowance — which offsets NICs for eligible businesses — will rise from £5,000 to £10,500 and the £100,000 eligibility cap will be removed. While this provides some relief, the overall impact on employer costs remains substantial.

How will these reforms impact employers?

Increased operational costs

The combined effect of higher NMW and NICs will lead to increased operational costs for businesses across the UK. Employers are facing unbudgeted costs, necessitating careful financial planning and adjustments to employment contracts and HR strategy to ensure compliance.

Potential for job reductions and restructuring

To manage these increased costs, many businesses are considering restructuring their operations or reducing their workforce. This could involve making redundancies, reducing working hours, or automating certain tasks to maintain productivity with fewer employees. While these measures can help control costs, they also carry risks such as decreased employee morale and potential legal challenges.

Before making any changes to employment terms and conditions or embarking on any redundancy process, employers must engage in early and meaningful consultation with employees (or their representatives). Any decision to vary terms and conditions, or to embark on any cost-cutting/ redundancy programme needs to be carefully planned to avoid claims such as breach of contract, unfair dismissal, or discrimination. Previously adopted ‘fire and rehire’ strategies are now much more difficult to implement. In particular, the Code of practice on dismissal and re-engagement has recently given power to employment tribunals to increase a protective award by up to 25% for an employer’s unreasonable failure to comply with the Code.

It’s crucial that you consult with employment law experts to navigate complex legal terrain and ensure that your strategies are legally sound. Tailored advice can help mitigate risks and support your business in making informed decisions. By taking these steps, employers can effectively manage employment law risks while addressing the financial challenges posed by increases in NMW and NICs.

How to navigate increased employer costs

Businesses can take immediate action in response to the increases to NMW and NICs and explore further options to minimise their costs in the long term.

Use the Employment Allowance

As outlined above, the Employment Allowance will rise from £5,000 to £10,500 and the £100,000 eligibility cap will be removed on 6 April 2025. Eligible businesses should ensure that they fully use this allowance to offset some of the increased NIC costs.

Update payroll and employment contracts in line with the changes

Payroll systems must be updated to reflect the new NMW rates and NICs thresholds to maintain compliance and avoid penalties. Employers must also ensure that employment contracts are up-to-date and reflect any changes in working practices. You should also review and update your policies and procedures to incorporate changes in statutory pay rates and new rights, such as neonatal care leave, to ensure that your business remains compliant with the latest employment laws.

Financial planning

Employers will need to carry out careful financial planning to manage increased payroll costs and ensure the financial health of the business. Some businesses may need to reallocate their budgets to accommodate higher wage and NIC costs. This could involve pay freezes, reducing spending in non-essential services and finding more cost-effective solutions for operational needs to free up funds for payroll. You may wish to consider other tax-efficient ways to manage costs, such as salary sacrifice arrangements. These arrangements involve employees agreeing to reduce their cash pay in exchange for non-cash benefits, such as pension contributions.

Where redundancies are unavoidable, our employment law team is experienced in advising on and directly handling business reorganisation and redundancy processes to ensure legal compliance. We can help you manage your risk while ensuring that you treat impacted colleagues fairly and empathetically.

Employee retention and engagement initiatives

To minimise the impact of potential salary freezes or job cuts, businesses are focusing on enhancing employee retention and engagement. This can include non-monetary benefits, career development opportunities and flexible working arrangements to help maintain employee satisfaction and reduce turnover. Employee engagement is more important than ever in these challenging times.

Improve efficiencies through automation and technology

Many businesses are investing in automation and technology, which can help maintain productivity levels while reducing the need for a large workforce. However, this approach requires careful planning and investment to ensure a smooth transition and avoid disruption to operations.

Review your processes to identify which areas might benefit from automation. For example, retail businesses may wish to introduce automation to their inventory management system to improve accuracy and efficiency. However, employees will require training to ensure that the new technology is used effectively. Any changes to processes must also be clearly communicated so that employees understand how automation will impact their roles. Establishing a culture of continuous improvement will be key to ensuring that automated processes are regularly evaluated and optimised to continue to meet business goals.

Talk to us

Staying abreast of legislative changes is crucial for ensuring compliance and maintaining operational efficiency. The Employment Rights Bill, the increases to the NMW and NICs and other 2025 reforms present significant challenges for UK businesses. By taking proactive steps to mitigate costs, employers can manage the financial impact while maintaining compliance and operational efficiency.

We are currently supporting a number of clients across all sectors facing these challenges. Contact us to discuss how best to balance delivering efficiencies while preserving engagement.

Give us a call on 0333 004 4488, email us at hello@brabners.com or complete our contact form below.