The importance of payroll forecasting as the employer NI increases loom!

The importance of payroll forecasting as the employer NI increases loom!

With 6 April 2025 looming which is the start date for employer National Insurance contributions (NICs) to increase, working with your accountant is a crucial part of your plans to guide your business through the financial and operational implications.

The rise in employer NICs and an increase in the national minimum and living wage (as advised in previous blogs) will add pressure to payroll budgets across sectors, particularly for SMEs operating on tight margins.

Mistakes in payroll management can result in financial penalties, increased costs and strained cash flow. Therefore, the importance of working with your accountants and payroll manager with regards to effective financial forecasting and strategic workforce planning, can help businesses mitigate the impact and maintain stability.

First, we need to understand the financial impact

The reduction in the secondary NI threshold, plus the additional 1.2% rise in the rate, will raise the cost of employing staff across all industries.

Businesses with apprenticeship heavy workforces will face an 18% rise in wage costs, while those with employees aged 18–20 will see payroll expenses increase by 16.3%. Other businesses could experience a 6.7% increase in overall payroll costs.

Sectors such as retail, hospitality, and construction will likely be particularly affected. With 13% of the retail workforce aged between 16 and 24, many businesses in this sector will likely look for ways to offset these increased costs without compromising profitability or competitiveness.

There is also the impact of increased wages, resulting in an increase in employer pension contributions for those employees who meet the age and wage criteria.

Hiring, payroll, and workforce strategy

As employer NI costs increase, businesses may look to reassess hiring plans, salary structures, and staff retention strategies.

Some may react by freezing recruitment or delaying pay increases, which could inadvertently harm employee engagement and retention. Others may restructure salary bands, particularly if they have wage structures tied directly to the national minimum wage.

Businesses do have access to financial relief mechanisms, such as the employment allowance increase from £5,000 to £10,500, which can help offset some of the additional payroll costs, particularly those with a small number of employees.

So, how can your accountant help you prepare

• Conducting payroll forecasting will be one of the most effective ways accountants can help businesses prepare. Payroll is often the largest single expense for a business, and accurate financial modelling will help clients assess the true cost implications of NICs and NMW increases, and plan accordingly.
  
  
• Advising on salary sacrifice schemes and pension optimisation is another area where accountants can provide valuable guidance. Salary sacrifice can be an effective way to reduce employer NI contributions, but not all pension schemes support this approach.
  Businesses will need expert advice to understand whether this is an option for them and how to implement it effectively.

Additionally, businesses should evaluate their pension contribution structures, as relief-at-source schemes may provide tax advantages for lower-paid employees earning between £10,000 and £12,570.

Accountants can help businesses identify applicable incentives, ensure timely applications, and integrate these into financial planning strategies, a recent report found that 73% of businesses that work closely with their accountants report stronger financial reporting, directly enhancing their ability to secure financing and business support. This is an important area for any business that employs staff and here at Kennedys Accounting we are always looking for opportunities to work with our clients in such matters.

• Advising on workforce planning and alternative hiring strategies will also be crucial in helping businesses navigate these financial challenges. Given the rising payroll burden, some businesses could consider alternative staffing arrangements such as part-time roles, job shares, or contract-based hiring.

Role of accountants in navigating change

The 2025 changes to Employer NICs, national minimum and living wage will create financial challenges for many businesses. In uncertain times, businesses often make quick financial decisions such as hiring freezes or cost-cutting measures which is understandable.

Here at Kennedys Accounting, we have the expertise to turn data into insight, ensuring clients make informed decisions rather than reactive ones. By using payroll forecasting, salary structuring, financial modelling etc., our accountants can help businesses navigate cost pressures while maintaining financial resilience.

Now more than ever, proactive financial guidance is the key to helping businesses not just survive these changes but thrive beyond them. Please contact us if you would like to discuss further.