How will the National Minimum Wage rise impact SMEs?

National Minimum Wage (NMW) and National Living Wage (NLW) are set to increase again from April 2025. Within this article we delve deeper into the impact of the NMW increase on SMEs, coupled with an increase in National Insurance Contributions (NICs), analysing key data statistics regarding labour costs within the industries that make most use of minimum wage pay scales, explore the effect the rise may have on these businesses, and experts from Price Bailey outline practical steps that your business can take to mitigate the adverse impact of the changes.

April 2025’s increase will see another huge increase in NMW since its introduction, and whilst many employees and businesses alike favour the proposed increases to reflect the uplift in the cost of living, a double-edged sword has presented itself, causing some SMEs to oppose the rise under the belief that it is only a ‘benefit’ to businesses that can afford the rise – this consensus has grown since the announcement that NICs would also be increasing by 1.2%, from 13.8% to 15%, from April 2025. The earnings threshold when employers start paying NIC will also be lowered from £9,100 per year to £5,000 (fixed until April 2028).

Paying just over an extra £1,500 a year for a full-time NMW worker (who is aged 21 or over) is a steep challenge, given the severe cost pressures already facing smaller businesses.

How much is the National Minimum Wage rising?

Wage band	Current NMW rate	New NMW rate from April 2025	Increase (£)	Percentage increase
National Living Wage (21 and over)	£11.44	£12.21	£0.77	6.7
18-20 Year Old Rate	£8.60	£10.00	£1.40	16.3
16-17 Year Old Rate	£6.40	£7.55	£1.15	18.0
Apprentice Rate	£6.40	£7.55	£1.15	18.0
Accommodation Offset		£10.66	£0.67	6.7

The minimum wage for those aged 21 and over, known officially as the National Living Wage, will rise by 6.7%, from £11.44 to £12.21 from April 2025. For someone working full time, or a 37.5-hour week, that equates to £23,873.60 a year, up from £22,368.06.

Whilst the biggest percentage increases are for those aged 20 and under, it is important to note that there are only a few people in these groups that work full time.

Workers under the age of 21 are eligible to the National Minimum Wage (NMW), which is the lowest hourly rate, if they fall under one of the following categories:

full-time employee
a part-time employee
casual employee
apprentice, in some instances.

Employers are required to pay employees aged 21 and above at least the National Living Wage.

Are wage costs increasing year-on-year for businesses?

The Low Pay Commission are responsible for monitoring the effects of the minimum wage across society. They estimate that 54% of all jobs paying at or below the NMW are situated within the retail, hospitality, and cleaning sectors.

In previous years, we looked at benchmarked performance data from the retail, hospitality, and manufacturing sectors in order to understand the impact of the rise in NMW on overall sector profitability. We found that:

From 2020 to 2022, across the selected sectors, profit margins have averaged around 7.3% for manufacturing, 5.1% for retail, and 5.81% for hospitality.
Setting these small margins against the average proportion of costs for these businesses attributable to wages, the manufacturing sector between 2020 and 2022 was 14.73%, the average percentage of wage costs for the retail sector was 8.9% for three years to 2022, and for the hospitality sector this was 31.42%.

While this data does not show the most up-to-date picture, it is still useful in displaying the very real impact that a rise in the NMW and NLW will have for these businesses. The direct increase in National Minimum Wage costs for many businesses will impact their bottom-line profitability at a time when these margins are already being squeezed.

Looking at the present, according to the latest information provided by the survey of businesses carried out by the ONS, for the period of June-August 2024, annual growth in employees’ average regular earnings (excluding bonuses) was 4.9%, with the manufacturing sector seeing the largest annual regular growth rate at 6.0%.

Wave 117 of the Business Insights and Conditions Survey (BICS), with the survey period 16-29 of September 2024, provides some insight into how businesses plan to adapt to any future increases in employment costs. Of UK businesses who have not permanently stopped trading, 23.9% plan to increase prices, 17.6% expect to absorb these increases in employment costs within their profit margins, and 6.8% plan to reduce their number of employees.

How are businesses responding to NMW increases?

An employee’s market?

For a large proportion of businesses that employ people on the NMW, this is usually the case because the business model is such that there is often not the capacity to pay staff anymore.

For those workers whom your business undoubtedly needs, as of 2022 there was greater choice between jobs offering NMW and NLW, particularly in heavily-saturated areas such as London, resulting in an employees’ market for these job roles. This meant that many SMEs in the retail, manufacturing and hospitality sectors were having to offer NLW in order to remain competitive.

However, despite over 15,000 businesses accredited with the Living Wage Foundation, analysis by said foundation reveals that the number of jobs paying below the NLW in 2023 was 3.7m, equivalent to 1 in 8 jobs. This is the first time since 2020 that this figure has risen, with a 200,000 increase on last year.

The availability of labour

Since the end of the UK’s transition out of the EU, the introduction of the new points-based immigration system is seemingly shrinking the UK labour pool. The system has induced mass-worker shortages in sectors where there was greater reliance on EU migrant staff. Many believe that the system is discouraging for young people, and that the UK will miss out on fresh talent due to the strict criteria.

It is thought that there were around 3.4 million EU citizens living in the UK a few years ago, most of whom were said to be ‘unskilled’ or ‘low-skilled’ workers. For those that support the points-based immigration system, it is seen as an opportunity for employers to become less reliant on the old UK’s immigration system as an alternative to investment in staff retention, productivity, and wider investment in technology and automation.

Technology investment

The biggest increase in the NMW and NLW rates yet, perhaps means that many businesses will favour investing in technology and part-time workers. Companies, particularly those in the retail and hospitality sectors, are focusing on and investing in effective online platforms to increase internet sales. If e-commerce sales increase, then it is likely that fewer staff will be required on the shop floor whilst higher-skilled workers e.g., website designers and editorial content creators, will be in higher demand as businesses shift their priorities. However, it is almost certain that SMEs will be spending a higher proportion of their revenue on wages compared to larger companies which are more likely to afford the latest advanced machinery to optimise their operations and therefore reduce their labour requirements.

Claire Berry, Employment Solicitor at Price Bailey:

“As a result of the National Minimum Wage increase, employers are going to have to absorb a National Living Wage increase of 17% in the space of just 2 years. This, alongside an increase in employers National Insurance contributions and the reduction in the threshold at which they start paying this, it is going to put considerable pressure on employers.

Employers will have to look at their efficiencies and consider where cost savings can be made both in terms of staff costs and in other areas of their business. This could lead to businesses reassessing roles and restructuring teams and/or outsourcing central functions such as marketing or payroll. This may result in redundancies or businesses offering staff reduced hours. Where gaps in the workforce are identified, it may be that businesses opt for part time employees, casual workers or contractors to reduce costs.

The National Minimum Wage increase will also have a knock on effect for others within the business who are expecting a pay rise, as these may be curtailed, and it could also have an impact on discretionary bonuses. Business owners also need to be willing to accept that they will have to absorb some of the pain in the short-term too. Owners should consider not taking bonuses of profits out of the business at the same time as not being able to offer their staff pay rises”.

Practical steps

There are practical steps that businesses can take to counter the potentially adverse impacts of NMW increases. As Simon Blake, SCF Partner and member of Price Bailey’s Executive Board, shares in more detail, scenario planning is key in these moments.

Many businesses are cautious about increasing their prices in the current economic environment, but in other ways, it is also a time when price increases are very justifiable.

With many businesses being faced with over a 10% increase in wages costs, including the 6.7% increase in NMW costs, £800+ per employee rise in National Insurance contributions and enhanced employment rights, it is a hard pill to swallow and not one that business owners can do nothing about. In situations such as this, businesses may consider reducing the hours of their staff, for example, in restaurant and catering businesses, they may reduce operating hours, or reduce the number of menu options available in order to mitigate the wage expense.

Ahead of the increases in April, business owners should also be taking the time to identify any loss-making areas of the business, and asking themselves why they are investing in these areas. Sometimes, there can be a positive reason for a business to invest in a loss-making area of the business, however, it is important for business owners and managers to understand the granular data to identify these and ensure the quality of higher level decisions.

As the costs of employment continue to rise, businesses may look to automation as a practical way to balance their budgets and mitigate the pressures of higher wage expenses. In response to the combined impact of National Minimum Wage increases, the rise in Employers’ National Insurance contributions, and enhanced employment rights, technology may increasingly take on tasks traditionally performed by staff—vending machines replacing servers in hospitality, automated ordering systems reducing the need for cashiers, or robotics handling basic tasks in office and retail settings.

While these innovations may offer short-term relief from labour costs, they can also contribute to the broader inflationary pressure, as businesses look to recoup their investment in technology and manage their rising expenses through price adjustments. As businesses face these new realities, scenario planning will be essential to remain competitive and resilient.”

Summary of thoughts

The upcoming NMW increases, in addition to an increased National Insurance contribution and enhanced employment rights, create both a very real and short-term challenge for many business owners. However, it also is another indication (alongside increases in energy prices and other input costs to businesses) that business owners should use now as the opportunity to properly consider the business models and investment plans that put them in a longer-term stable position, rather than knee jerk responses to external fluctuations.

Moving forward, many smaller businesses may see an overall decline in their labour costs as they choose to focus on investing in technology, and transfer staff to part-time contracts. This has very real consequences for the individuals who themselves are at the painful end of the cost of living crisis. Alternatively, many SMEs will and perhaps should consider passing on the cost increase to their consumers, as now is likely the best time to be able to successfully do this.

If you have any questions regarding how the National Minimum Wage increase will impact your business and the best way to prepare for further cost increases, you can contact Simon Blake or Claire Berry using the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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