The pressure is on! As we look to 2025, many small business owners in the UK are facing some big financial challenges.
With the National Living Wage rate increasing from £11.44 per hour to £12.21 per hour for workers aged 21 and over (a whopping 6.73% increase);employer national insurance (NI) contributions increasing by 1.2% to 15% and the threshold for NI contributions being reduced by £4,100 to just £5,000 per annum many businesses will feel the impact like falling dominoes.
Not only this, as a small business owner in 2025 you might find yourself juggling additional pressures on your finances like increased business rates at the same time as preparing to comply with even more stringent rules when employing and dismissing an employee (but we’ll talk about that in another blog). These changes combined will no doubt add to the pressures that small business owners already face in this challenging market.
So it is normal to be feeling deflated and wondering how to keep up. Let us walk you through these issues during this Talk Money Week! and help you think about how to prepare for the challenges ahead.
First Domino: Pressure on the Margins
While higher wages are great for workers, they can put a lot of pressure on service businesses like hospitality, retail, and social care, which often hire less experienced staff and therefore rely more heavily on minimum wage workers. This increase in pay means a big jump in costs for these businesses. On top of that, the changes to employer national insurance contributions are tightening budgets even more, increasing payroll costs and making it harder for businesses to keep their profit margins healthy.
Of course, higher wages can make employees feel better about their jobs, but businesses might need to cut back on staff hours or even reduce staff numbers to manage their expenses. This could end up affecting the quality of service they provide.
You might want to consider:
- Flexible Scheduling: Spend time analysing the flow of your business and try adjusting work hours to ensure you have enough staff during busy times without overstaffing during slow periods
- Gradual Price Increases: Consider raising prices a little over time. This way, you can offset some of the increased payroll costs without shocking your customers
Second Domino: Eroding Wage Gap
In professional fields like tech, law, and engineering, and many more, a big concern is the shrinking pay gap between skilled and less skilled and experienced workers. As the minimum wages goes up, the difference in pay between entry-level jobs and more skilled positions gets smaller. This can lead to employee morale issues and make it harder to keep talented employees.
Business owners might find themselves in a position of not only having to increase wages at the lower ends of their pay scales, but also find increasing demand from their skilled workers for equivalent increases, which if not addressed can make them feel undervalued, affecting motivation, effort and retention.
But in an environment of lower inflation more in the 2-3% region, where you can’t pass all the increased costs on to the customer base, you have to seriously ask, where is the money coming from?!
Now is a good time to start the preparations and:
- Regular Pay Audits: Check your pay structures regularly to make sure skilled jobs are still competitive and match market rates. If they are not, start developing a plan of how to get there as soon as possible
- Focus on Benefits and Growth: With wage pressures high, highlight non-salary benefits like training, flexible work options, and career advancement opportunities to keep skilled employees motivated and engaged
- Explore Variable Pay Options: Consider using bonuses, performance incentives or even share options. This way, you can manage payroll costs while rewarding and retaining your top performers.
Preventing a Domino Collapse
With all these financial changes coming up, it's really important to update your financial plans. If you don’t prepare now, you might run into unexpected costs that could hurt your business. Start getting ready for 2025 now by:
- Review Employee Benefits: As wages rise, think about offering more affordable benefits that still keep your employees happy and loyal but do not hit your bottom line so hard.
- Update Your Financial Plans: Make sure to revise your financial plans and budget to ensure they include these new costs. Consider how you will be able to fund any increases such as raising your prices, streamlining activities, reducing unnecessary costs. Planning ahead in this way will help you avoid any surprise money issues later on.
Conclusion
Handling these changes might feel tough, but with some proactive steps, expert advice, and a solid financial plan, you can navigate this challenge smoothly. Whether it’s fine-tuning staffing in service businesses or keeping morale high in professional fields, preparation is key. If you need more help with this, just reach out to us! We’re here to support you every step of the way.