National Living Wage & National Insurance increase

National Living Wage (NLW) and National Minimum Wage (NMW) is increasing – What can you do to reduce the impact?

Starting from April 1st, 2025, the National Living Wage (NLW) will see a substantial increase to £12.21 per hour from £11.44. This significant 6.7% rise is a direct response to the rising cost of living under Labour’s Plan to Make Work Pay. Instead of reflecting the inflation rate, Labour’s change in rules means the NLW now reflects the cost of living.

The government has also announced a significant increase in the National Minimum Wage (NMW) for 18 to 20-year-olds, raising it from £8.60 to £10.00 per hour. This is the largest single increase in the NMW on record.

These changes are part of a broader strategy to align the NMW and NLW, ultimately leading to a single adult wage rate. Increases are set to continue in coming years as the government stated that it aims to eventually put 18-year-olds on par with the over 21’s.

Hidden extra cost: National Insurance threshold reduction

A4G partner, Emma White is advising that employers must proactively prepare for the upcoming changes to the National Minimum Wage (NMW) and National Living Wage (NLW) that will take effect in April 2025. Alongside this, Employers’ National Insurance will also increase in April 2025.

“These changes together will significantly impact the cost of employing workers. For example, the cost of employing an 18-year-old on the National Living Wage working 30 hours a week will increase by over 22%.”

Here’s a breakdown of the costs:

We have completed some detailed analysis that reveals that larger employers with a lower average salary will experience the most significant increase. For example, a company with 15 employees earning an average £12,500 each annually could see a 2.29% jump in salary costs. This is because the lower threshold affects a larger portion of their employees’ salaries.

Smaller businesses with similar salaries might not be hit as hard due to the increased Employment Allowance. In our example, a company with 5 employees on £12,500 might see no increase at all.

However, the impact isn’t solely based on salary level. A company with 15 employees earning £100,000 annually might see a smaller percentage increase (1.19%) but still face a larger absolute cost increase due to their higher salaries.

Proactive steps to reduce impact of NLW and NI increase

The rise in NMW and NLW is going to affect many businesses, especially those with a high proportion of low-wage workers.

Below are some ideas on how you can reduce the impact on your business.

1. Conduct a break-even analysis

A real break even point calculation goes beyond the traditional break even analysis which shows how much turnover is needed to make a profit.

Real breakeven point indicates how much turnover is needed not just to cover company expenses, but what the owner needs to draw from the business to cover their lifestyle, factoring in taxes on both dividends and profits.

Once you have this figure you know how much you need to increase pricing and/or turnover.

“There is no such thing as standing still, the world is changing so if you aren’t moving forward, you are going backwards and ultimately less profitable than last year” commented A4G Partner Josh Curties.

2. Increase your turnover

While increasing your turnover may not immediately offset the rising labour costs, it’s a strategic move that can significantly improve your bottom line over time.

Here are some effective approaches:

• Revamp your marketing strategy (if you haven’t got one, get one!). This needs to include things like:
  • Targeted marketing campaigns, utilising email, social media, and content marketing
  • An easy-to-use website
  • A drive to increase google reviews
• Think about how you can cross-sell and upsell your products / services more. This can be done by offering complementary products/services or higher-tier versions to existing ones.
• Optimise your sales process. This includes streamlining your process using automation and reducing the time it takes to close a deal.
• Build a referral marketing strategy (e.g. word of mouth marketing). It’s something we all naturally have within our business but not always something we properly strategise. Think about building a loyalty programme or building a group of contacts who all refer to one another.

3. Invest in technology and increase productivity 

Invest in technology, such as AI and automation software to optimise your workflow and reduce time spent on tasks. This will make your employees more productive, freeing up their time to work on higher value work that will bring more sales in. Or it will reduce the need for that employee, and you can hire less staff / part-time employees, thus saving you money on wages.

For example, Pizza Hut recently announced that they will change their ordering systems to make it less staff intensive using an app and digital ordering.

In order to this, you need to keep track of your data. For example, you may want to introduce flexible working so your team can work more hours during busier periods and reduced hours during quiet periods.

We have an experienced team who are knowledgeable on all thing automation. We can help you find the right software and tools for your business, and help you implement it seamlessly.

5. Prioritise employee retention

Since the UK’s full departure from the European Union, the implementation of the new points-based immigration system has had a significant impact on the nation’s labour market. Many sectors, particularly those heavily reliant on EU migrant workers, have experienced acute labour shortages. Critics argue that the system’s stringent criteria deter young, skilled individuals from seeking opportunities in the UK, hindering the country’s ability to attract and retain top talent.

Before Brexit, approximately 3.4 million EU citizens resided in the UK, many of whom filled roles traditionally considered “unskilled” or “low-skilled.” Proponents of the points-based system view it as an opportunity for employers to reduce their reliance on immigration as a quick fix and instead invest in long-term strategies such as staff retention, productivity improvements, and technological advancements.

The tightening labour market and rising labour costs have intensified competition for top talent. To attract and retain skilled employees, employers should consider implementing the following strategies:

• Competitive Compensation Packages: Offer competitive benefits, including flexible work arrangements and comprehensive health insurance.
• Employee Development and Recognition: Invest in employee development through training programs. Regular performance reviews and recognition programs can boost morale and engagement.
• Positive Workplace Culture: Foster a positive and inclusive work environment where employees feel valued and supported. Encourage open communication, feedback, and collaboration.

5. Increase your pricing

Increasing your prices is never a popular one but it’s something all businesses need to do. You may be cautious about increasing your prices in the current economic environment, but it is actually a time when price increases are very justifiable. It is, however, crucial you approach this carefully. A poorly executed price hike can alienate customers, especially in a competitive market. We go into this in a lot more detail in our article, Should I increase my pricing, but here are some strategies to consider:

• Value-Based Pricing: Instead of simply increasing prices, focus on the value your products or services offer. Highlight any improvements, additional features, or enhanced customer experience to justify the price increase.
• Targeted Price Increases: Not all products or services need to be equally affected. Identify items with higher profit margins or those that are less price sensitive.
• Transparent Communication: Be open and honest with your customers about the reasons for the price increase. Explain how it will impact their experience and how you’re working to mitigate the costs.
• Phased Approach: Consider implementing price increases gradually, rather than a sudden shock. This can help soften the blow and reduce customer resistance.

6. Make sure you payroll software is up to date:

• Verify employee rates: Confirm that all employees aged 21 and over are paid at least the NLW of £12.21 per hour.
• Adjust younger worker rates: Ensure that younger workers are paid the correct NMW for their age group.
• Review contracts: Examine existing contracts, especially for apprentices and younger employees, to guarantee adherence to the new rates.