The Global Payroll Association (GPA) has reported that more than a quarter of small and medium-sized enterprises (SMEs) in the UK are contemplating reducing their workforce due to changes in the Autumn Budget.
The recent adjustments to employer National Insurance contributions and an increase in the National Living Wage, announced on 30 October, are expected to intensify financial strain for many small business owners.
In April 2025, the Labour government will raise the rate of employer Class 1 National Insurance contributions from 13.8 percent to 15 percent. Additionally, the National Living Wage, also known as the National Minimum Wage, is set to rise by 6.7 percent, reaching £12.21 per hour for those aged 21 and over. Despite exemptions being announced for small and micro businesses, UK SMEs anticipate increased costs for hiring and retaining employees, which could lead to tough decisions on staffing.
To understand the potential impact of these changes, GPA conducted a survey of SME owners to assess their intended responses to the upcoming increases in staffing costs. Survey results showed that nearly a third (29 percent) of SME owners expect that the rise in NI contributions will place significant financial pressure on their businesses. However, the anticipated National Living Wage increase is even more concerning for many, with 18 percent of respondents reporting that wage growth worries them more than the National Insurance changes.
SMEs Plan Adjustments to Mitigate Rising Labour Costs
As these staffing cost pressures grow, SME owners are considering a range of strategies to manage their budgets. More than one in five (21 percent) respondents indicated they are now more likely to promote salary sacrifice arrangements, such as pension contributions, as a way to reduce direct wage costs. Additionally, 35 percent of SME owners said they would be less inclined to approve pay raises above the National Living Wage rate in 2025.
While some businesses are planning adjustments to salary structures and benefits, others are considering significant changes to their workforce plans. Forty-two percent of business owners stated they are now less likely to increase headcount next year, with more than a quarter (26 percent) saying they may need to cut jobs to manage the added financial demands.
Impact on Wages, Employee Benefits, and Headcount
Melanie Pizzey, CEO and Founder of the Global Payroll Association, said, “Due to a huge pressure to honour election promises, the Labour government was unable to directly increase taxes on what they refer to as ‘working people’. As such, they have had to look at other ways to increase funding for the public purse, one of which is to increase National Insurance employer contributions.
“The issue here, of course, is that such an increase puts businesses under additional financial strain which will likely result in those same working people losing out on pay rises or losing jobs altogether. Add to this an increase to the National Living Wage and suddenly businesses are facing significant cost increases which leaves many wondering how to mitigate this increase.
“While the workforce is, of course, the biggest cost to a business, there are other ways to reduce outgoings, not least through technology integration to streamline processes and maximise efficiency. At GPA. we’re seeing this done with great success in payroll departments, and no doubt the same can be done in almost all other corners of business.”
Avoiding ‘Talent Freezes’
Small businesses cutting jobs and halting hiring was an outcome many expected when the Autumn Budget was announced. Some have cautioned small businesses against making rash decisions when it comes to staffing.
René Janssen, CEO and co founder of talent development platform Lepaya, said there is a real risk of hiring freezes turning into “talent freezes”.
“Attracting new talent is an important part of growth, but a pause or slowdown in recruitment can also provide an opportunity for businesses to pivot to internal talent development,” Janssen said.
“New skills don’t have to come from external sources and promoting internal talent development can deliver huge benefits for organisations – not just to help them stay ahead of new developments in technology like AI, but also to ensure that they stand a better chance of retaining the talent they have by offering employees the incentive of personal and career development.”
