In the wake of rising operational costs, businesses across the UK are feeling the pressure. A major contributor to this financial strain is the recently announced increase in employer National Insurance (NI) contributions, which comes into effect from April 2025. Many employers are now facing tough decisions, including whether they may need to consider a reduction in their workforce as a means of mitigating the added expense.
The National Insurance Increase: A Burden on Employers
From 6th April 2025, the UK Government are reducing the per-employee threshold at which employers become liable to pay NI (the Secondary Threshold) from £9,100 to £5,000 per year. Alongside this, they have announced an increase to the rate of employer Class 1 NI contribution rates from 13.8% to 15.0%. This means businesses will essentially be paying more for each employee, with no immediate reprieve in sight. Serious consideration will, therefore, need to be given by many employers as to how to best deal with the additional financial burdens they could be facing.
The NI rise is particularly impactful for small and medium-sized enterprises (SMEs), which often operate on tight margins and may have fewer resources to absorb such increases. That is not to say, however, that larger corporations will not also feel significant effects, especially for companies that rely on a large workforce or have slim profit margins. It is likely that such employers will have to evaluate and alter their long-term strategic planning, including decisions on hiring, expansion or automation.
Redundancies as a Reaction to Rising Costs
In response to these increases, many businesses are considering potential redundancies to reduce their overall wage bills. It might seem like an obvious solution, but it’s important to recognise that redundancies come with their own set of costs and challenges. We have highlighted a few of the key considerations below: -
Redundancy Pay
Employers are legally required to provide statutory redundancy pay to employees who meet the eligibility criteria, this being:
- They have been a contracted employee of the employer;
- They have at least two years of continuous service with the employer; and
- They have been dismissed by reason of redundancy (or temporarily laid off or put on short time working, in certain situations).
The rate of statutory redundancy pay is based (subject to any caps) on an employee’s age, length of employment (counted back from their date of termination to their commencement date) and weekly pay.
Employees will receive:
- half a week’s pay for each full year of employment they were under 22;
- a week’s pay for each full year of employment they were 22 or older, but under 41; and
- one and a half weeks’ pay for each full year of employment they were 41 or older.
It is important to note that the length of service is capped at 20 years. An employee’s weekly pay is also currently capped at £700; the maximum amount of statutory redundancy pay therefore being £21,000.
To calculate weekly pay, as this can fluctuate for some employees, employers should work out the average an employee has earned per week over the 12 weeks before the day their role was confirmed to be redundant.
Where an employer has contractually committed to pay enhanced redundancy pay (i.e. redundancy pay over and above the statutory entitlement), this higher rate of pay would need to be honoured. Similarly, if an employer has confirmed that they will make redundancy payments for those employees with under two years continuous service, such payments must be made.
Legal and Consultation Costs
If an organisation is considering making any redundancies, they are required to follow legal processes, including consulting with affected employees (or potentially employee representative or trade unions). Under current law, if an employer is proposing 20 or more redundancies in one establishment within a 90-day period they need to hold collective consultation with any recognised trade unions, or if there is not one, appointed employee representatives.
Obtaining legal advice on such a process is important to ensure the right steps are followed and the process is lawful, however, this of course has costs associated with it. In addition, there is often a lot of management time involved in undertaking the process.
Loss of Talent and Expertise
Redundancies can result in the loss of experienced and skilled employees, which can disrupt operations and erode organisational knowledge. Rehiring or training new staff is costly and time-consuming.
Impact on Morale
Announcing redundancies can have a ripple effect on the remaining workforce, leading to uncertainty, reduced productivity, and a negative impact on company culture.
Given these challenges, redundancies should not be the first or only response to rising costs. Instead, businesses should explore other strategies to reduce their financial burden while preserving their workforce and the company’s long-term sustainability.
Alternatives to Compulsory Redundancies: Cost-Saving Exercises for Employers
Fortunately, there are several alternatives to compulsory redundancies that can help companies manage the increase in employer NI costs and other rising expenses. Employers should take steps to consider alternatives to redundancies prior to commencing any redundancy process and placing any employees at risk of redundancy. Following this, if it is considered that the redundancy process needs to be commenced, employers must continue to consider alternatives throughout the entire process (even if an employee’s role is confirmed redundant and they are working their notice period) in a bid to avoid redundancies, where possible.
Some of the alternatives that employers should consider include: -
Flexible Working Arrangements
Allowing employees to work flexibly or remotely can lead to cost savings in several ways. For example, reducing the need for office space, utilities, and other facilities can lower overhead costs. Moreover, flexible working can increase employee satisfaction and productivity, thereby reducing turnover and the costs that inevitably come with recruitment and helping to retain talent. Employers can also consider offering job sharing or reduced hours as alternatives to redundancy.
Salary Adjustments and Pay Freezes
Some businesses may look at freezing salaries or reducing pay increases to offset rising overheads. In some cases, temporary salary cuts or delaying raises can be a way to manage costs without resorting to redundancies. However, it’s important that the business communicates any changes with staff, whilst offering guidance and reasoning to reassure them of such changes and obtain employee buy-in and consent to the same. Employers should ensure that such measures are fair and where appropriate, temporary.
Reducing Non-Essential Spending
Reviewing the company’s budget and cutting back on non-essential expenditure can also make a significant difference. This might involve reducing discretionary spending on areas like marketing, travel, office supplies, or outsourcing. By focusing on the essentials, companies can free up funds to absorb the added NI costs.
Job Reshuffling and Role Re-design
Rather than cutting jobs, businesses can consider reshuffling roles or re-designing job functions to align with changing business needs. This may involve cross-training employees to perform multiple roles, allowing the company to operate more efficiently while retaining key staff. It is important to note, however, that where restructures occur, this can result in potential redundancies, depending on the proposed restructure and existing roles at the time.
Reviewing Benefits and Bonuses
Re-evaluating employee benefits, bonuses, and perks can also help cut costs. For instance, employers may consider temporarily reducing their employer pension contributions to the statutory rate. While it's important to retain a competitive edge in the job market, temporarily reducing or suspending certain bonuses or perks (like annual events, corporate memberships, or company cars) can save significant amounts without impacting core salaries.
Offering Voluntary Redundancies or Early Retirement Packages
If redundancies are necessary, offering voluntary packages can be a more compassionate and cost-effective solution. Employees who are considering retirement or those looking for new opportunities may be willing to leave the company on their own terms, without the need for a formal redundancy process having to ensue.
Conclusion: A Balanced Approach to Rising Costs
The upcoming increase in employer’s NI contributions is a challenge that many businesses, particularly SMEs, will need to navigate in the months ahead. Whilst redundancies may seem like the easiest way to address rising costs, this is not the only solution to this, and nor should it be considered as such. It is important that alternative cost-saving measures (such as those listed above) are properly explored in the first instance, and as an ongoing obligation, to allow employers to manage the increased financial pressure whilst maintaining their workforce and organisational stability.
By taking a balanced, strategic approach to cost-cutting, businesses will be better placed to weather the storm of rising expenses and emerge stronger on the other side, with their talent and resources intact. Redundancy is not the only solution to this, and nor should it be considered as such.
Should you want any advice, please do get in touch with Wright Hassall’s Employment Law team who can discuss upcoming changes and assist you to prepare.
The information provided in this article is provided for general information purposes only, and does not provide definitive advice. It does not amount to legal or other professional advice and so you should not rely on any information contained here as if it were such advice.
Wright Hassall does not accept any responsibility for any loss which may arise from reliance on any information published here. Definitive advice can only be given with full knowledge of all relevant facts. If you need such advice please contact a member of our professional staff.
The information published across our Knowledge Base is correct at the time of going to press.
