For many small businesses, 2025 has brought a new kind of pressure point. Not a dramatic one-off crisis, but a steady, monthly squeeze that shows up the moment payroll runs. Employer costs have risen because two big changes landed in April. Employer National Insurance contributions increased to 15 percent and the earnings threshold where employers start paying these contributions dropped to £5,000 a year. At the same time, the National Living Wage rose to £12.21 per hour for workers aged 21 and over.
Taken individually, each change is manageable. Together, they create a real payroll squeeze, especially in sectors that rely on hourly teams and tight margins. Retail, hospitality, care, construction trades and many service businesses are feeling it first. If your business employs staff at or near minimum wage, the cost per employee has risen in two directions at once, wages up and employment taxes up.
This article looks at what has changed, why it matters and how small firms can respond without panic or knee-jerk cuts.
What exactly changed in April 2025
The two headline shifts are simple to describe.
First, employer National Insurance. From 6 April 2025, the main employer Class 1 NIC rate rose from 13.8 percent to 15 percent. On top of that, the secondary threshold, the point at which employers start paying NIC on an employee’s earnings, fell from £9,100 to £5,000 per year. That means employers pay NIC on a bigger slice of each employee’s pay, not just at a higher rate.
Second, the National Living Wage. From 1 April 2025, it increased to £12.21 per hour for workers aged 21 and over. For a full-time employee, that is a meaningful uplift over the year, and it feeds into overtime, holiday pay and pay differentials for more senior staff who expect their own rates to stay ahead.
There is some relief for smaller employers. The Employment Allowance, which reduces an employer’s NIC bill, increased to £10,500 a year. But for many businesses, especially those with several employees, the allowance softens the blow rather than removing it.
Why this hits small firms harder than big ones
Large employers can often spread payroll cost increases across huge revenue bases, negotiate better supplier terms or invest in automation quickly. Small businesses rarely have that cushion. A modest rise in costs can land directly on the owner’s take-home pay or on already thin margins.
There is also a timing problem. Wage and NIC costs rise instantly, but price changes, productivity improvements and sales growth take time. This creates a gap where cash flow feels tighter even if the business is fundamentally healthy. The Office for Budget Responsibility has noted that higher employer NIC raises costs for businesses and can weigh on profitability.
A calm way to assess your exposure
Before changing anything, it helps to measure the impact clearly. Many owners sense payroll pressure but do not quantify it, which makes decisions feel emotional.
Start with three simple numbers.
- Your total monthly wage bill.
- Your total monthly employer NIC bill.
- Your wage bill as a percentage of revenue.
Compare these numbers to the same months last year. If your wage bill has risen faster than revenue, that is where pressure comes from. This also helps you separate structural cost increases from temporary issues like a slow month or a one-off project dip.
Practical responses that do not involve panic cuts
Most small businesses will need a mix of small adjustments rather than one dramatic move. Here are four grounded strategies that are working for many firms this year.
1. Revisit pricing before you revisit people
If payroll is rising and your prices have not moved in 12 months, you are effectively absorbing the cost increase yourself. A modest, well-explained price adjustment often protects jobs and stabilises cash flow more than cutting hours or headcount.
The key is to tie price rises to value, not to your costs. Customers accept price changes when they understand what they get for them. If your service has improved, your delivery is faster or your product quality remains high in a tougher economy, that is part of the story.
2. Tighten rota planning and paid time usage
Many businesses lose thousands a year not through wage rates but through small inefficiencies in scheduling. Overstaffed quiet days, overtime that could have been avoided with earlier planning, paid hours where there is not enough work to fill them.
Sharpening rota planning, tracking peak and off-peak patterns and setting clearer rules around overtime can reduce wage waste without reducing wages.
3. Use allowances and thresholds properly
The updated Employment Allowance can make a real difference for eligible businesses, but only if it is claimed and applied correctly. Likewise, making sensible use of tax-free allowances, such as mileage, trivial benefits or training that improves productivity, can reduce effective payroll pressure while keeping staff supported.
This is not about gimmicks. It is about making sure you are not paying more employment tax than you need to, especially now that NIC costs are higher.
4. Strengthen cash flow forecasting
Payroll squeezes feel worst when cash flow is reactive. A rolling three-month cash forecast helps you spot tight periods early and plan around them. It also stops you mistaking a timing issue for a profitability issue.
If a quarterly VAT bill or a seasonal dip lands in the same month as higher payroll, you can prepare for that in advance, rather than reaching for short-term borrowing at the last minute.
The staff conversation matters too
When wages rise in the wider economy, so do expectations. Even if your pay rates are above minimum wage, staff may still feel pressure in their own lives and may look for higher hours or higher pay.
Being transparent about the reality of payroll costs can help. Many employees do not realise that a wage increase also increases employer NIC, pension contributions and holiday pay costs. Explaining this clearly can support a more collaborative approach to productivity and scheduling.
Looking ahead through the rest of 2025
“The businesses best placed to handle the payroll squeeze are not necessarily the biggest or the busiest,” according to Brightx. “They are the ones that treat payroll as a system, not just a monthly bill. That means planning staffing levels around real demand, pricing for sustainability, and keeping a clear view of margins.”
2025 is a year where small changes in costs have bigger consequences. But it is also a year where small improvements in efficiency and pricing can protect profitability quickly. If you take time to measure the impact, adjust calmly and avoid reactive cuts, the payroll squeeze becomes a manageable challenge rather than a threat.
Paid to thrive, not just survive
Higher wages and employment costs are a reality of running a business in 2025. The aim is not to fight that reality, but to adapt to it in ways that keep your business stable and your team secure. When payroll pressure rises, the answer is rarely a single dramatic fix. It is a steady set of improvements that keeps your numbers honest and your business resilient.
