NI increase forces half of businesses to freeze pay

Will Drysdale, Senior Reporter, Business & Accountancy Daily

One in five companies have already cut jobs, while 51% have put a freeze on salary increases after employers’ National Insurance hits companies.

Rachel Reeve’s National Insurance increases for employers have begun to impact the economy with more than half of business leaders saying they have already frozen or plan to put a stop to salary increases this year. One in five (22%) have already done with 29% planning to do so.

From April employers’ NI went up 1.2% from 13.8% to 15%, coupled with the damaging reduction in the secondary threshold from £9,100 to £5,000, creating a turbulent environment for businesses and employees hit by staff cuts.

One in five businesses have already cut jobs while 33% have pencilled in headcount reduction in their future plans, taking the total to 53%, found a survey of 500 business owners with a turnover of £5m plus, conducted by S&W, formerly Evelyn Partners.

But it is not only jobs that are being cut as a quarter of companies have reduced staff hours, with another 35% planning to cut employee hours in a bid to save money as well.

Businesses are facing a cocktail of risks, with rising costs, high utility bills and raw material prices all cited as key areas of concern beyond the tax rise.

However, the biggest issue at the moment, felt by 41% of respondents, was the rising cost of employing people with the double hit of higher NI and above inflation rises to national minimum wage.

Alex Simpson, partner at S&W said: ‘‘This should come as no surprise given previous NIC increases prompted warnings from the Office of Budget Responsibility that ‘the economic incidence of the tax is passed through entirely to lower real wages in the medium term’.

‘For most businesses, the extent of the employers’ NIC change was a surprise. We anticipated an increase in the employers’ rate, but the additional reduction to the earnings threshold was not expected and is expected to have a dramatic impact over time.’  

While staff are losing their jobs and seeing reduced hours, prices are also set to rise with 76% of companies planning to increase prices as a direct result of NI rise.

As well as this, plans for growth have been postponed for now or are going to be, which 61% of businesses agreed upon. Additionally, 21% of businesses said they have already started using automation technology, including artificial intelligence (AI) tools, to replace people with the risk that technology will start to replace jobs faster in the future. A further 38% are planning to up their use of automation as well.

Claire Burden, partner at S&W said: ‘Businesses face considerable challenges in the current economic climate, and many owners are having to make difficult decisions to stay afloat.  

‘Given that salaries represent a considerable proportion of the overall cost base for most businesses, it is to be expected that many are looking closely at headcounts in response to the increased National Insurance costs.’

From 21 April the national minimum wage (NLW) increased to £12.21 per hour, which is £457.88 per week and £23,810 annually. This increased from £11.44, a 6.7% increase, hiking up costs for minimum wage employers, and another reason for reducing headcount.