In the wake of the recent Autumn Budget, small and medium-sized businesses (SMEs) across the UK are grappling with the impact of planned changes to employer National Insurance contributions and the National Living Wage.

The Global Payroll Association (GPA) reports that these updates are prompting more than a quarter of SMEs to consider reducing their workforce to manage the additional financial strain.

Key Budget Changes Affecting Small Businesses

On October 30th, the Labour government announced significant adjustments in the Autumn Budget that directly impact business operating costs. Two main changes stand out:

1. Increase in Employer National Insurance Contributions: Starting in April 2025, employer Class 1 National Insurance contributions will increase from 13.8% to 15%. This rise is expected to affect businesses’ payroll costs and challenge their ability to sustain current staffing levels.
2. National Living Wage Hike: Also set to take effect in April 2025, the National Living Wage (NLW) will see a 6.7% increase to £12.21 per hour for workers over the age of 21. While beneficial for workers, this change adds another layer of financial obligation for employers, especially smaller businesses that rely heavily on front-line staff.

With both adjustments hitting businesses simultaneously, many SMEs are concerned about how to shoulder the increased payroll expenses without sacrificing profitability or growth.

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SMEs Face Tough Choices to Manage Increased Staffing Costs

To better understand how SMEs are responding, the GPA conducted a survey among UK small business owners, gauging their attitudes toward the new financial pressures. The survey results reveal widespread concern and outline potential strategies to manage increased labour costs:

• Rising Concern Over National Insurance and Wage Hikes: Nearly a third (29%) of SME owners expressed concern that the increased National Insurance contributions would strain their finances. However, the mandated National Living Wage increase has generated even greater apprehension, with 18% of respondents indicating that the wage hike is their primary worry.
• Adjusting Benefits and Salary Policies: In response to these financial pressures, over one in five (21%) SME owners report they are more inclined to implement salary sacrifice arrangements, such as employee pension contributions, to offset some payroll costs. Additionally, 35% of business owners plan to hold back on approving pay raises beyond the new NLW threshold next year.
• Cutting Back on Workforce Expansion and Hiring: An even starker measure comes in the form of hiring freezes and potential job cuts. A substantial 42% of SME owners now plan to hold back on expanding their workforce. More concerning still, 26% of surveyed businesses may need to resort to job cuts to cope with the rising costs brought on by the budget’s changes.

How the Autumn Budget May Reshape Employment and Business Strategy

The reactions from UK SMEs underscore a challenging landscape for employers as they strive to adapt to heightened costs. Melanie Pizzey, CEO and Founder of the Global Payroll Association commented on the dual impact of the budget’s provisions on businesses and employees alike:

“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, leaving many wondering how to mitigate this increase.”

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Strategic Adaptations: Exploring Technology and Efficiency

While reducing the workforce is one approach, Pizzey emphasises that businesses can also consider alternative measures to manage costs effectively. Investing in technology and automation can help streamline operations and drive efficiency, reducing some of the burden on labour costs.

“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,” Pizzey says. “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.”

From payroll automation to productivity-boosting software in other departments, leveraging technology offers SMEs an opportunity to offset rising labour costs without drastically cutting headcount.

Read More: Reducing Operating Costs: What You Can Do Right Now

Moving Forward: Balancing Employee Well-Being and Financial Stability

As the April 2025 deadline approaches, many SMEs are wrestling with how to balance the dual imperatives of employee well-being and financial sustainability. The coming months will likely see businesses experimenting with a mix of cost-saving measures, from reducing discretionary benefits to postponing hiring and embracing more efficient business processes.

The Autumn Budget has undoubtedly created a difficult environment for SMEs, forcing tough decisions that could reshape the job market and employee benefits landscape. However, through strategic planning and adaptation, businesses may find ways to navigate these challenges and sustain their operations in an increasingly demanding financial climate.