National Insurance Increase Impact on Job Market

How will increased employer National Insurance rates impact the job market and SMEs?

The recent Autumn Budget announcement confirmed a 1.2% increase in employer National Insurance (NI) contributions, raising the rate from 13.8% to 15% from April 2025. Additionally, the threshold for NI contributions has been lowered from £9,100 to £5,000, which will now bring many lower-income and part-time workers into the NI system.

After analysing the data from the Autumn budget our research, which is based on the average employee salary of £37,000 in the South East of England, confirms that any business with more than six employees will be paying higher National Insurance than before.

While these changes are expected to generate substantial revenue for the Treasury, they also pose significant challenges to the job market, particularly for small to medium-sized enterprises (SMEs). Rachel Reeves offered some support for small companies with an improvement in the Employment Allowance raising it from £5,000 to £10,500 whilst removing the £100,000 threshold that's currently in place.

The Institute for Fiscal Studies (IFS) estimates that these changes could raise approximately £25 billion for the Treasury, aiding in the reduction of the country’s fiscal deficit. While this may bolster public services, the associated costs are likely to create ripple effects throughout the economy, with potential implications for hiring, employee benefits, and salary structures.

Impact on Hiring and Employment Practices
Higher employer NI contributions translate to increased hiring costs, especially for SMEs with limited cash flow. There are some key ways this could unfold.

• Reduced Hiring for Full-Time Roles: Facing higher employment costs, businesses may slow down hiring plans for full-time roles, opting instead for part-time and temporary positions. This could limit employees’ options for permanent, stable jobs, affecting career progression and job security.
• Increased Reliance on Freelancers and Contractors: To manage rising costs, some employers may lean more heavily on freelancers and contractors. While this offers businesses flexibility, it also means less job security and fewer benefits for workers, impacting overall economic stability.
• Stagnant Wage Growth: To offset additional NI costs, employers may pause or limit salary increases. This could result in lower wage growth over time, particularly in sectors where pay rises are already modest.

Challenges for SMEs

Our early stage research from the SME market for salary growth for 2024 and beyond shows a significant reduction in the appetite of the sector to continue with inflation busting salary increases. For SMEs, the NI increase will prove particularly challenging. Unlike large corporations with more diversified budgets, SMEs often have limited financial flexibility, making them more vulnerable to cost increases. This may put pressure on their ability to attract talent, drive growth and compete against larger firms. Our findings, from speaking to a number of our customers since the budget announcement, is that the NI increases will be absorbed and offset by reducing salary increases in the year ahead.

• Potential Layoffs and Price Increases: An increase in NI could force some SMEs to increase prices, hold back on hiring for growth or, in extreme cases, lay off staff. All options could harm local economies where SMEs are major employers.
• Struggles to Maintain Benefits: SMEs that offer attractive benefits to retain talent may now struggle to maintain these perks. Reduced benefits could lead to higher turnover rates, as employees look to larger companies with more comprehensive packages, putting further pressure on SMEs to recruit and train new staff.
• Postponed Expansion Plans: Facing increased employment costs, some SMEs may choose to postpone expansion plans, limiting growth and reducing potential job creation

Broader Economic Consequences

These changes may also have more far-reaching consequences for the economy as a whole, especially in the short term:

• Inflationary Pressures: As companies adjust to higher NI costs, some may pass these expenses onto consumers through price increases, potentially exacerbating inflation. Higher costs may reduce household spending power, leading to a slowdown in sectors that depend heavily on discretionary spending, such as retail and leisure.
• Reduced Consumer Confidence: Higher costs for businesses could mean fewer salary increases or reduced benefits for employees, negatively impacting consumer confidence. This drop in consumer spending could, in turn, affect sectors that rely on consumer demand, creating a possible cycle of reduced spending and slower economic growth.

Strategic Responses

With the increased costs from NI, businesses, particularly SMEs, may need to consider creative solutions to remain competitive and financially viable:

• Automation and Digital Transformation: The impact of higher employment costs may drive firms to consider alternatives to traditional employment and accelerate automation and digital transformation to reduce their reliance on human capital. In the short term, this may drive up productivity and improve efficiencies, but longer term, it may negatively impact jobs.
• Investment in Upskilling: To maximise productivity per employee, some companies may invest in upskilling initiatives that enable employees to handle multiple functions or specialised tasks. By improving productivity, these investments could help offset the increased cost burden from NI.

Conclusion

The changes to employer National Insurance contributions in the latest Budget are likely to significantly shape the job market and influence business practices. While large corporations may have the resources to adapt more readily, SMEs face particular challenges, from adjusting hiring practices to reconsidering employee salaries and benefits packages.

Employees may feel the indirect impact of these changes through reduced benefits, fewer opportunities for pay increases, and an evolving job market where stability becomes increasingly rare. In the broader economy, these increased employer costs may contribute to inflationary pressures and slow down growth in certain sectors, potentially dampening consumer confidence.
As each sector adapts, this shift underscores the need for businesses to find new ways to stay competitive, deliver growth and thrive in an increasingly challenging economic environment.

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“In terms of the increase in employers NI, it is not as bad as some were expecting, and although it may see a short term reduction in growth hiring, especially in SMEs where this increase could mean they don’t look to add to their teams for a while, the expected reduction in interest rates predicted on 7 November could inject some energy and hopefully see people begin to hire again soon.”

John Lynes, Director Ashdown Group