How SMEs can offset rising National Insurance costs in 2025

From April 2025, National Insurance (NI) contributions for many employers across the UK rose from 13.8% to 15%.

Alongside a reduction in the threshold at which contributions are due, this change will likely have a disproportionate impact on small and medium-sized enterprises (SMEs).

While larger companies may be able to absorb the hike, the same cannot be said for their smaller counterparts.

The government’s policy paper concedes that 940,000 employers will see their contributions increase, with only 250,000 set to benefit from a reduction and 820,000 expected to see no change at all.

For SMEs, already facing mounting costs from legislative changes and a challenging economic environment, this is yet another financial strain.

SMEs ‘hit hardest’

When the changes were first announced, Gareth Burrows, founder of Breathe HR, said, “Unlike big businesses, SMEs don’t have a deep well of resources. The tax increase for employers - which is expected to be announced in the Budget - will therefore hit smaller businesses hardest.

“At the same time, 63% of SME bosses say they will be disproportionately impacted by the costs of implementing changes outlined in the new Employment Rights Bill.

"The significant impact of these combined, upcoming costs could therefore put some SMEs in precarious financial positions. This puts workers at risk too, if employers are forced to downsize as a result.”

Research from industry body GRiD, which surveyed senior HR decision-makers in January 2025, echoed these concerns.

The results found that over a quarter (28%) of respondents said increased costs imposed by the government, such as higher employer NI contributions, would pose a challenge to their business. 

When broken down, 30% of SMEs showed concern, compared with 25% of large corporations. Moreover, 38% of HR leaders said that insufficient budget was the main reason preventing their company from offering more robust employee benefits. 

Offsetting the cost

The picture may seem bleak - but amidst the mounting challenges, there are measures SMEs can take to mitigate the impact of rising NI contributions.

Experts suggest that strategic use of government allowances and employee benefit schemes can offer great relief while playing a part in retaining employees - and talent.

1. Claim the increased Employment Allowance

One key move by the government to soften the blow is the rise in the employment allowance from £5,000 to £10,500. This allowance allows eligible businesses to reduce their NI bill, providing vital breathing room.

To qualify, a business must have more than one employee or director paid above the secondary threshold and must not be primarily operating in the public sector. Charities are also eligible. 

On the other hand, sole-director companies with no other employees, and those where over 50% of work is public sector, will not qualify. Those employing individuals for personal work, like nannies or gardeners, are also excluded.

While not a silver bullet, for many SMEs this allowance could offset a large portion of the additional NI liability - and it’s crucial that qualifying businesses act promptly to claim it.

2. Offer salary sacrifice schemes

Another possible tactic lies in the use of salary sacrifice schemes. These arrangements allow employees to give up a portion of their salary in exchange for non-cash benefits such as pension contributions, electric vehicles, or participation in cycle-to-work schemes.

The sacrificed salary is exempt from both employee and employer National Insurance, thus offering savings on both sides.

Sorangi Shah, Client Director at Towergate Employee Benefits, said, “Employers not currently utilising salary sacrifice for pensions are potentially missing out on savings for their business and their employees.

"Utilising it could be a very efficient way for them to make significant savings, particularly following the cost increases that have now come into force with the new National Insurance contribution levels."

Not only do such schemes reduce the NI bill, but they also offer greater benefits to staff. This is an important consideration when SMEs are trying to attract and retain talent without the option of large pay rises. Which leads to the next point…

3. Consider tax-free perks instead of pay rises

Traditional pay increases are now a more expensive option due to the increased NI burden. In response, SMEs should think creatively about employee compensation. There are a variety of HMRC-approved, tax-free perks that can serve as attractive alternatives to salary increases.

This includes topping up pensions, offering private healthcare, or enrolling employees in tax-efficient share schemes. These not only improve employee satisfaction and retention but can also reduce employer tax liabilities.

Ifty Nasir, founder and CEO of Vestd, said that, “the most obvious and most powerful perk that a company can introduce in this vein, is an employee share scheme. 

“If a company is worried about salary increases, offering a slice of the pie is another tangible way to help employees build personal wealth without impacting too heavily on the company’s bottom line.

“Additionally, if you are nervous about losing employees due to salary stagnation, you should know that share schemes are a compelling way to hold onto your talent. 95% of our customers agree that their scheme has helped with employee loyalty.”

4. Reassess the ROI on employee benefits

With budgets tightening, HR departments are being asked to justify every pound spent – and employee benefits are no exception. 

Katharine Moxham, spokesperson for GRiD, said, "Employers will understandably be looking at their budgets in all areas to manage the additional NI contributions and other financial pressures.

"It’s unlikely that HR will be exempt from the tightening of purse strings, so they must prepare to demonstrate the effectiveness of their employee benefits programmes to retain the maximum possible budget for them."

To maintain support for these programmes, HR teams need to capture and communicate the business value of benefits, whether that’s in improved employee engagement, lower turnover, or greater productivity.

Final thoughts

With the increase of employer NI contributions, SMEs face a unique set of financial challenges. However, with proactive planning and smart use of the schemes and tools available, they may not only weather the storm but emerge more agile, more dynamic and more cost-efficient than ever.

A share scheme might be just what you're looking for, and with Vestd, it won't cost the earth to set up. Book a free, no-obligation consultation to explore your options.

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