How Higher Minimum Wage Rates and Budget Changes Will Affect Small Businesses and Take-Home Pay

The Autumn Budget 2024 has introduced several measures aimed at improving wages and employee welfare, including significant increases to the National Minimum Wage (NMW) and changes to National Insurance contributions. While these measures aim to benefit employees and improve disposable income, they also bring new challenges for employers—particularly small businesses. Here’s a breakdown of how these changes will impact both employers and employees, and some strategies to manage these transitions effectively.

The Rise in the National Minimum Wage: A Double-Edged Sword for Small Businesses

From April 2025, the NMW will see a substantial increase:

• For employees aged 21 and over, it will rise by 6.7% to £12.21 per hour.
• For younger workers (18–20 years), it will increase by an impressive 16.3% to £10 per hour.

For a full-time employee over 21, this translates to an additional £1,400 per year before tax. While this is undoubtedly good news for workers, for small businesses, this change poses financial strain, especially for those operating in sectors with already slim profit margins, such as retail, hospitality, and care services.

Challenges for Small Businesses:

1. Increased Wage Bills:
   Small businesses that rely heavily on minimum-wage employees will see their wage costs rise significantly, potentially impacting profitability.

2. Difficulty in Passing Costs:
   Unlike larger companies, small businesses may struggle to pass these costs on to customers through price increases, as they face greater competition and price sensitivity in their markets.

3. Cash Flow Pressure:
   Many SMEs already operate on tight budgets, and higher payroll expenses may cause cash flow issues, particularly for businesses with seasonal demand.

National Insurance Contributions: Another Cost for Employers

In addition to higher wages, businesses will face an increase in Employer National Insurance Contributions (NICs) from 13.8% to 15%, effective April 2025.

This change adds another layer of costs for employers and may discourage hiring, especially in labour-intensive industries. The reduction of the secondary NIC threshold from £9,100 to £5,000 further exacerbates the financial burden, as more of each employee’s salary becomes subject to NICs.

Impact on Employees: Take-Home Pay and Disposable Income

For employees, these changes bring both benefits and challenges.

Positives:

• Higher Wages:
  Employees earning the minimum wage will benefit directly from the increased rates, putting more money in their pockets.

Challenges:

• Indirect Effects of Employer NIC Increases:
  While employee NIC rates remain at 8%, the rising employer contributions may indirectly affect workers. Employers facing increased costs may reduce other benefits, such as bonuses, training programs, or additional perks, to offset their financial burden.

• Inflationary Pressure:
  Businesses may raise prices to cope with increased costs, reducing employees’ purchasing power and negating some of the wage benefits.

Strategies for Small Businesses to Adapt

To remain profitable and competitive while managing these changes, small businesses should consider the following strategies:

1. Streamline Operations:
   Automating repetitive tasks, optimizing processes, and eliminating inefficiencies can help reduce labor costs without compromising service quality.

2. Explore Tax Relief and Grants:
   Check for government incentives or tax reliefs available to support businesses transitioning to higher wage bills, particularly in sectors like manufacturing or green energy.

3. Invest in Employee Productivity:
   Offering training to upskill employees can improve productivity, enabling businesses to achieve more with fewer resources.

4. Reassess Pricing Strategies:
   While small businesses may find it difficult to raise prices, a modest increase coupled with enhanced value (e.g., better service or unique offerings) may be more acceptable to customers.

5. Emphasise Employee Retention:
   Retaining skilled staff is more cost-effective than hiring and training new employees. Focus on improving employee satisfaction and loyalty through clear communication, benefits, and flexible work arrangements.

How Employees Can Prepare for Budget Changes

For workers, now is the time to:

• Revisit Personal Budgets: Use the expected wage increases to plan for savings or pay off debts.
• Anticipate Indirect Costs: With potential price hikes in goods and services, it’s essential to monitor spending habits to maintain disposable income.
• Maximise Employer Benefits: Make the most of non-wage perks offered by employers, such as pensions, healthcare, or training opportunities.

Conclusion: Striking a Balance

The changes introduced in the Autumn Budget 2024 reflect a broader shift toward higher wages and increased tax revenues. While employees may enjoy a higher income, businesses—especially SMEs—will need to adapt to rising costs to remain sustainable.

At Exchange Accountants, we are here to help businesses and employees alike navigate these changes. Whether it’s managing payroll adjustments, exploring tax-efficient strategies, or creating a personalised financial plan, our team of experts is ready to support you.

If you have any questions or concerns about how these changes will affect you or your business, don’t hesitate to get in touch. 

Contact us today to discuss your needs.