Why UK Businesses Are Facing Their Toughest Year Yet

UK businesses are facing mounting financial pressures due to a series of escalating costs. From higher National Insurance contributions to rising wages and inflationary pressures, many business owners are struggling to maintain profitability. Understanding these changes and planning accordingly is crucial to navigating the current economic landscape.

Employer National Insurance Contributions (NICs) Set to Rise

One of the most significant upcoming changes for businesses is the increase in employer National Insurance Contributions (NICs). Announced in the October 2024 budget, this rise will take effect in April 2025, increasing employer NICs from 13.8% to 15% on salaries above £5,000.

For businesses employing a large number of staff, particularly those in low-wage industries such as retail, hospitality, and care, this increase represents a substantial additional cost. With already tight margins, employers may need to reassess their workforce strategy, look for efficiency savings, or even consider restructuring to accommodate this added expense.

National Minimum Wage Increase Driving Up Labour Costs

As of April 2024, the National Living Wage increased by 6.7% to £11.44 per hour. In addition to the wage hike, the age threshold for receiving the National Living Wage was lowered from 23 to 21, further increasing payroll costs for businesses employing younger workers.

For sectors heavily reliant on lower-paid employees, such as retail and hospitality, this presents a challenge. Many businesses are already under strain, and increasing wage bills could force employers to cut hours, reduce staff, or pass on costs to customers through higher prices.

Inflation Continues to Put Pressure on Businesses

Despite some fluctuations, the UK’s inflation rate remains stubbornly high, affecting the cost of goods, services, and everyday business operations. The Office for Budget Responsibility (OBR) predicts that inflation will not return to the Bank of England’s 2% target until 2025. Furthermore, living standards are not expected to return to pre-pandemic levels until at least 2027–28.

For businesses, this means rising expenses across the board. From raw materials to transportation and energy bills, inflation is squeezing profit margins. Many companies have already increased their prices to compensate, but consumer spending power remains limited due to the cost-of-living crisis, making price increases a delicate balancing act.

Soaring Operational Costs

Beyond wages and taxes, businesses are grappling with rising operational costs. Rent, utilities, and supply chain expenses have surged, making it increasingly difficult for many firms to remain viable. High street retailers, in particular, are feeling the squeeze, with some being forced to close locations or relocate to more affordable premises.

For businesses with physical premises, energy costs remain a major concern, especially as government support schemes have been phased out. With electricity and gas prices remaining volatile, business owners must explore energy efficiency measures and negotiate better contracts with suppliers where possible.

Preparing for the Future

With multiple financial pressures converging, businesses must take proactive steps to manage their costs. This might include reviewing workforce structures, renegotiating supplier contracts, and exploring automation or efficiency improvements. Seeking professional advice on financial restructuring or business recovery options can also help businesses navigate these challenges.

For those struggling to manage increasing financial obligations, early action is key. Understanding the available options, such as restructuring, administration, or even a Members Voluntary Liquidation (MVL) for solvent businesses, can make all the difference in securing a stable future.

If your business is feeling the strain of rising costs, now is the time to review your financial position and consider the next steps.