Increasing employer NIC - how to pay for it

When its cost base goes up, a business will take steps to mitigate the profit erosion it has suffered.? So, where cost to employ increases (as it will do from April 2025 via the increase in employer NIC), employers will look at ways to offset the hit to profit.? We know they will do this, because there is no concept of “free profit”.? All profit is pre-spent in some way.?

Businesses are run off the back of ratios and metrics – and gross margin is one that no one will want to see reduce.? Even where there is an explanation for it.? The interesting debate, therefore, is not whether a business will take steps to eliminate the negative impact of a rise to employer NIC.? Because it will.? It is what steps it will take.

There are two types of conversation to have:

First, can it put its prices up?? I am unable to add to the debate around inflation, price elasticity and customer appetite for a particular product or service.? So, I shall leave well alone, I am afraid.

Secondly, can it make savings?

There are two ways of looking at savings.? First, what can it save across the totality of spend?? Again, I have no idea.? Talk to someone in procurement.?

Then, what can it save that goes directly to gross margin?? Or more specifically towards cost to employ?

There are 5 things to think about.

Nice idea, but not very effective

The first bucket of activity is “doing things that won’t make much difference”.?? For example, implementing a cycle to work scheme. No one has ever arrested a slide in gross margin by implementing a cycle to work scheme.? Because whilst such a scheme offers a clear opportunity to realise savings, they are only realisable if (a) your employees’ want a bicycle and (b) they don’t have one already.? It doesn’t take a financial analyst of note to establish that the target audience you are going for is not high enough to make much difference.? I am afraid the same goes for electric car schemes.? Great savings are available.? But your employee (you got it) must want an electric vehicle (and not already have one) for the savings to come good.

I am not saying don’t think about such things.? But recognise that they primarily enable an employee to realise savings if they want to.? It’s this element of choice that makes their use as a margin improvement tool a little shaky.? The one exception to this rule is pension salary sacrifice.? If you don’t do this already, then ring me up. There will be savings to be had, I would surmise.

Pay restraint

Now this is an interesting one.? Not that long ago, it was proposed that employee NIC was going to increase by 2%.? This proposal was withdrawn. And now, after much too-ing and fro-ing, we find ourselves in a place where employer NIC is increasing (at the top end) by 1.2%.?

Conceptually, in a perfect economic world, as an employee I would rather employer NIC increase by 1.2% and the full cost of that increase be passed on to me via a reduced pay rise, than to pay 2% more tax.? So, possibly, pay restraint is a pretty good answer to the conundrum we are fixing for.?

But…

We don’t live in this perfect economic world.? Meaning for an employer to simply reverse- hypothecate a pay reduction in real terms to offset an increased tax burden simply won’t work.? An employer, logically, should continue to base its pay review on the same drivers as it has always done.? Because to do anything else is a fast road to a very confusing story for employees.

I am sure someone will write in and say that it is also illegal to pass on employer NIC cost to employees. Which is true. I hope the clarification helps.

Managing performance

2025 may well be the year of performance management.? As we begin to manage the perfect storm of improving employment rights (for employees) and increased employment cost pressures, we shall certainly see steps to enable better performance management to begin to be taken.? Because at the end of the day, keeping poor performers without improving their performance is a bad business decision.

But wasn’t it ever thus?? So, what this will really be about is creating clearer expectations of what good performance looks like, a better feedback loop to manage performance in real time, better evidence and a sharper process to intervene (outside of year end windows) when things are not going well.? Which is another way of saying, this route is attractive.? But requires some real management (or support) to land well.?

Hiring reduction

Can a business manage headcount differently?? It's too difficult to cover the ins and outs of workforce planning in a paragraph.? So best I don’t even start.? Although it seems pretty clear, notwithstanding all of the recent scaremongering, that the mooted increase to employer NIC is less likely to precipitate a mass redundancy exercise than a more gradual slowdown in hiring.? Investment cases, replacement hires, apprenticeships.? All will be looked at just that little bit closer.?

The maths is quite compelling.? Say your NIC bill has increased by ￡1m.? And your average salary is ￡40k.? You only need to not replace (or not create) 25* heads for you to have covered the cost increase.? Whether 25 heads are material to your operation or not is for careful consideration.? But either way, of all the routes open to an employer, this likely represents the easiest (and quickest) win.?

(* I have worked this out ignoring on-cost, corporation tax relief and a calculator.)

But that’s only four?!

I know.? Because the last one sits in the utopian world where a business seeks to deliver higher productivity with its current (higher cost) headcount by its people going the extra mile, providing exceptional customer service and working hard as part of highly engaged teams.? The employer, in effect, is able to soak up the increased business burden of increasing employee NIC because it is delivering more for less.? And, more importantly, its people are happy with that outcome.?

To achieve this requires that perfect blend of leadership, vision, culture, career, environment and reward and performance decisions and interventions.? It would be a genuinely purpose driven “fix” in a working world where purpose is a somewhat overused expression.? It would deliver benefits outside of a single cost saving cycle.? It would garner improvements outside of pure cost.?

So, what’s not to like?? Well, it’s likely not to be a single year fix.? And there is likely not to be a linear relationship between the inputs made to deliver the desired future state and the outputs achieved as a consequence.? So that means it’s the best answer, but probably the least likely to be selected.?

That said, we shouldn’t be purist about this.? Selecting this route “as well” as one of the other fixes is a perfectly decent outcome.? And maybe represents the smartest business decision – with a hedging of bets and backing of more than one horse.? We are but a gambling analogy away from a pragmatic and progressive set of fixes...