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Rising employment costs for UK employers

Lower-paid workers will be welcoming the National Living Wage uplift coming later this year, but these increased costs could mean that employers can no longer afford to employ their workers.

Just as the cost of living crisis is severely impacting many households across the UK, it’s also hitting UK businesses. While some may reduce their employment costs by scaling down their number of staff, this isn’t always possible – meaning some businesses may end up shutting down completely.

Here’s a summary of recent changes affecting employment costs in 2023, and how these are likely to impact employers and their employees.

National Living Wage increase

While the National Minimum Wage applies to workers under 23 years old, the National Living Wage was introduced in 2016 to ensure that adult workers over 23 would be able to earn enough to cover the cost of living.

When the new tax year begins in April 2023, the government will be increasing the National Living Wage by 9.7%. This means that the statutory minimum wage for over-23s will be rising from £9.50
an hour to £10.42 an hour.

At the same time, the National Minimum Wage rates will also be going up by 9.7% for workers between 16 and 20 years old, while 21-22 year olds will see the biggest increase of 10.9% (from £9.18
an hour to £10.18 an hour).

Eligible workers will welcome the pay rise, of course, but it’s still not keeping up with inflation – which rose to a 40-year high of 11.1%
in October before dropping to 10.7%
in November.

While employees are likely to still struggle with the cost of living crisis despite the pay rise, employers are also likely to struggle with the increased costs of employment. It will be especially difficult for self-employed owners of small businesses.

This may lead to many employers having to make hard choices about cutting back their workforce, resulting in increased layoffs as they try to keep their businesses afloat.

National Insurance threshold freeze

On top of the incoming statutory wage increases, employees will also see another small pay rise indirectly via the scrapping of the 1.25% Health and Social Care Levy and frozen thresholds for National Insurance Contributions (NIC).

Several earnings thresholds for NIC rates were already frozen until 2026, but these freezes are now being extended to 2028. This includes the Secondary Threshold – the level that employers must begin to pay Class 1 Secondary NICs for employees – which is fixed at £9,100
a year (£175 per week or £758 per month) until April 2028.

As wages increase but NIC thresholds stay the same, larger employers will soon see their NIC costs stealthily increasing. This is one of many ways that businesses could be caught out by fiscal drag.

Smaller businesses with fewer employees could be somewhat shielded from this particular trap by the Employment Allowance, which can reduce an employer’s Class 1 NIC liability by £5,000.

Would your business benefit from payroll services?

There’s no doubt that 2023 will be another tough year financially across the UK, for workers and employers alike. It’s more important than ever to re-examine your financial operations and ensure that you’re working as efficiently as possible – which includes managing payments and tax liabilities on time, and making the most of any allowances you may be eligible for.

If you are a small business owner, you may benefit from the expertise of accountants in Barnsley and Leeds. Here at GBAC, we provide a range of financial services, from bookkeeping and VAT management to outsourced payroll administration. We may be able to assist you in streamlining your payroll and NIC management, so don’t hesitate to get in touch if you feel that your current system could be more efficient.