Rising Employment Costs Are Squeezing Small Businesses to Breaking Point

A Factsheet from

Every week I speak to small business owners who can no longer pay themselves a salary. 

They’re drowning in paperwork, debt and rising costs they can’t control. One of the biggest culprits is the cost of employing people.

From April 2025, the cost of taking on an employee has shot up. The employer’s National Insurance contribution has risen from 13.8% to 15%, and the threshold has dropped dramatically from £9,100 to just £5,000. For a micro business paying someone just above the National Living Wage, that’s hundreds of pounds per year extra per employee. And the National Living Wage itself has risen to £12.21 per hour for anyone over 21. The intentions are good but the timing and delivery have had a crushing effect.

By Liz Barclay Register at http://www.business111.com for more factsheets By Liz Barclay

If you’re running a café, cleaning service, repair shop or childcare business, these increases aren’t just numbers on a spreadsheet. They’re the difference between hiring someone or doing it yourself; between training a school-leaver or cutting hours; between expanding or giving up.

Most small business owners I know want to pay fairly, give people decent wages and job security, and they want them to stay. But they’re also juggling energy prices, insurance premiums, rent and rates. Meanwhile customers are having to tighten their belts. There’s only so many increased outgoings you can absorb before the maths stops working.

When the National Living Wage goes up and so does employer NI. Your payroll costs can rise by 10% or more overnight. You’re last in the queue to be paid and from what people are telling me many are no longer able to take an income out of their own businesses.

The government has a fair point that raising wages helps boost demand in the economy. More money in workers’ pockets should mean more spending. But that only works if small businesses have the margin to cope. At the minute many don’t and the result is a painful irony: trying to protect jobs by increasing pay could actually cost jobs.

Some owners are making tough decisions. Many tell me they’re not replacing staff who leave. Others are scrapping their plans to recruit and some are switching from employees to freelancers, to cut NI bills. Other coping mechanisms include reducing hours or offering unpaid leave to avoid redundancies. That’s not good for workers, many of whom are struggling on reduced incomes, or for business owners. It’s survival mode.

Small businesses want the Government to give them: 

 A higher employment allowance for the smallest firms and National Insurance relief for micro employers, especially in low-margin sectors like care, hospitality and retail. Training subsidies to make hiring young people less of a gamble would help too.

When you’re juggling wages, VAT returns and tax bills, you’re not just a boss. You’re a crisis manager, bookkeeper, HR adviser and therapist, all rolled into one. The stress can lead to sleepless nights and anxiety and depression.

What works for big business can’t be cut and copied for micro and small firms. A five-person workshop in Lincolnshire is not the same as a multinational in Stevenage. Policy needs to recognise that difference.

If we want small businesses to thrive and not just survive, we have to create conditions that support sustainable hiring and policies that reflect the reality on the ground. Work has to pay for everyone. 

Rising employment costs don’t just affect employers. They affect employees, families, local communities and wider society. They shape who gets hired, who gets trained, and who has a chance at building something better. We must not price that out of reach.