Major government policy changes came into effect in April 2025, ushering in a new landscape for UK businesses, particularly SMEs. With increases to National Insurance Contributions (NICs), rises in the National Minimum Wage, and a reduction in business rate relief, small businesses are bracing for significant financial shifts in the year ahead.
While the rise in the Employment Allowance offers some relief, many businesses — especially in sectors such as retail, hospitality, and leisure — are likely to face growing financial pressure. Funding Circle, a leading platform for SME finance, has analysed the changes and is encouraging businesses to act early to safeguard profitability and manage the impact.
Key Changes at a Glance:
- Employment Allowance: Increased from £5,000 to £6,000.
- Employer NICs: Raised from 13.8% to 15% on salaries over £5,000.
- National Living Wage: Uplifted to £12.21/hour for workers aged 21+.
- Business Rate Relief: Cut from 75% to 50%, capped at £110,000 per business.
- Business Size Thresholds: Adjustments introduced to reduce admin burdens for smaller firms.
The Cost to UK Businesses
The reality for many business owners is a significant increase in costs. ONS data shows that average employer payroll expenses have already risen by over 12% in the last two years. Based on projected 2025 figures, a small business with 10–15 employees near the minimum wage threshold could see an annual cost increase of between £12,000 and £20,000 when NICs, NMW, and business rates are factored in.
Sector Spotlight: Who’s Most at Risk?
Hospitality
The reintroduction of full business rates and rising employment costs are set to have a particularly heavy impact on pubs, cafés, and hotels. A key concern for the hospitality sector is the lowered threshold for employer National Insurance Contributions, from £9,100 to £5,000, which will bring many younger workers into the tax net. This shift is especially significant for hospitality, where younger employees make up a large share of the workforce and have previously fallen below the threshold. The hospitality sector employs 28% of all 18- to 20-year-olds, and is set to face a 3.8% increase in employer costs between 2024 and 2025. This outpaces the economy-wide average, where employer costs are projected to rise by 2.5%.
According to data from Altus Group, pubs will see their average business rates bill more than double from £3,938 to £9,451, while restaurants face the steepest increase, rising from £5,051 to £12,122. These cost hikes are largely driven by the reduction in business rates relief for retail, hospitality, and leisure, and come at a time when many high street businesses are already grappling with escalating wage and tax burdens. In total, these changes are projected to cost the hospitality sector around £3.4 billion annually.
Retail
Although UK footfall saw an uptick of 4.6% in March 2025, retailers are bracing for the financial strain brought on by the Government’s upcoming budget changes. For retailers already navigating tight margins, increasing rent, and large staffing needs, even slight wage hikes carry significant consequences. The wholesale and retail sector employs 26% of workers that fall into the 18-20 year old age bracket, with the changes in minimum wage and national insurance contributions. It’s expected that employers’ costs will rise by 3.1% in this sector.
The British Retail Consortium estimates that recent policy changes to National Insurance Contributions and the National Living Wage will raise retail employers’ wage bills by around £367 million. The lowering of NIC thresholds is likely to pull more part-time and entry-level roles into the tax bracket, potentially reducing incentives to hire. Overall, the combined financial impact could cost the retail sector over £5 billion annually.
In short: sectors that rely heavily on people, particularly young and low-wage employees, with significant outgoing costs such as premises and goods are facing the most pressure.
Steps Businesses Should Take Now
Funding Circle advises businesses to act swiftly, offering four key strategies:
1. Review Workforce Strategy
Taking a proactive look at your team structure can pay off, especially when budgets are tighter. It’s about making sure every role in your business is pulling in the right direction and directly supporting your goals.
There’s a huge opportunity to streamline by bringing in digital tools or automation for repetitive admin tasks, like payroll, HR, or customer service. It frees up time, reduces the need for extra hands, and often speeds things up. For smaller businesses, outsourcing non-core areas to specialist providers can also be a smart, budget-friendly move that keeps things lean and agile.
2. Refresh Pricing Models
Rising costs mean it’s time for businesses to take a fresh look at their pricing strategy. Adjusting prices isn’t just about covering new expenses; it’s about making sure your business stays profitable while still offering real value to your customers. Be open about why changes are happening and focus on what your customers get in return, whether that’s better quality, improved service, or more sustainable choices.
Start by doing a proper cost analysis to understand how recent policy shifts are impacting your bottom line. Use this insight to make sensible, well-timed pricing updates that reflect both your market and your brand. At the same time, take a closer look at your stock levels and sales patterns. Smarter forecasting and better inventory management can help reduce waste and boost efficiency.
- Streamline Operational Costs to Maximise Savings and Enhance Profitability
As businesses face rising expenses, it is crucial to take a proactive approach to streamline operational costs without compromising quality or customer satisfaction. Now is the ideal time to audit and evaluate every area of your operation for potential savings, ensuring that your business remains efficient, competitive, and profitable.
Renegotiate Supplier Contracts: Renegotiate supplier contracts to secure better pricing and terms, or explore alternative suppliers. Consider group purchasing for bulk discounts.
Review Energy Usage: To reduce energy costs, businesses should regularly assess their energy consumption and expenditure to pinpoint opportunities for savings. This could include switching to energy-efficient lighting, installing smart thermostats, and comparing energy providers to ensure they’re getting the best possible rates on their monthly bills.
Reduce Property Costs: If you have a large office, consider downsizing to save money. Remote working and coworking spaces are good alternatives to traditional offices.
4. Explore Finance to Manage Cash Flow
Working capital finance, such as business loans or a revolving line of credit, can offer breathing space as you adjust to new cost structures. At Funding Circle, our fast, flexible finance options are designed to help businesses stay in control of their cash flow, even in times of change. They can provide:
- Buffer Against Increased Operating Costs
- Improved Cash Flow Management
- Support for Strategic Investments
- Maintain Business Operations During Transitions
- Flexibility and Fast Access to Funds
- Cost-Effective Financing Options
Jerome Fernandez, Managing Director: FlexiPay at Funding Circle comments: “This is more than just a new tax year—it’s a turning point. Businesses that start planning now will be in a stronger position to adapt, compete, and grow in 2025 and beyond. The April changes may feel daunting, but with the right strategy, and the right financial support, UK businesses can navigate these challenges and emerge more resilient than ever.
At Funding Circle, we understand that businesses are facing a period of significant change and rising costs. That’s why we’re committed to offering fast, flexible, and affordable working capital finance solutions that give businesses the breathing room they need to adapt. We aim to help businesses stay in control of their cash flow, make strategic investments, and manage the financial pressures that come with changing cost structures. We believe that with the right support, businesses can continue to grow and thrive, even in the face of uncertainty.”
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