Higher wages are on the horizon again for workers on the National Minimum Wage (NMW) or National Living Wage (NLW), after the government accepted the latest recommendations from the Low Pay Commission in its Autumn Budget. From 1 April 2025, those aged 21 and over can expect a 6.7% increase in pay as the National Living Wage hits £12.21 per hour. Wages for younger workers will take a proportionally larger step up, with a 16.3% increase to the 18 to 20-year-old rate taking the National Minimum Wage to £10 per hour. For 16 and 17-year-olds and apprentices, an 18% increase will take their minimum hourly rate to £7.55.
Faced with these higher staff costs, owners of small businesses have the choice to pass on the additional burden to their customers by raising prices or to find ways to absorb the increase. This latest challenge to balancing the books is made harder by the increase to Employers’ National Insurance Contributions, among other tax increases announced by the Chancellor on 30 October.
Rising wages typically affect smaller companies more than larger organisations: Without the benefit of economies of scale, smaller businesses have less margin to absorb increased costs, making it harder for them to compete on price. Sectors such as hospitality and retail are particularly exposed, with wage bills being one of their biggest expenses and higher numbers of their workers on the Minimum Wage or National Living Wage.
But, according to the experts we spoke to, there are plenty of options available to make savings in other areas of their business. Read on for NerdWallet’s tips on how to stay in the black when wages go up.
Carry out a cost-cutting audit
However your business fared before Chancellor Rachel Reeves opened the red box, policy changes present an opportunity to review your financial position. List all your outgoings and then highlight the areas where you think there might be a chance of reducing expenditure. Chris McNicholas, business support partner at BizBritain, which supports UK start ups and small to medium sized enterprises (SMEs), told NerdWallet that there are plenty of options available to make savings.
- Get ready to negotiate
When it comes to bills, the message from McNicholas was not to assume your current deal is a good one. Don’t be afraid to renegotiate with suppliers, he said. “Whether that’s your internet, electricity, your stationery, or your stock.” There may be a better deal out there.
- Monetise empty space
If you’re paying for business premises, it’s important to maximise every corner. For a hairdresser, that could be converting a stock cupboard into a treatment room that can be sublet to a beauty therapist, or renting out a salon chair to a freelance stylist.
- Consider switching banks
Switching to a free business bank account that offers additional services could save you money on essential outgoings such as your accounting software. If your current business account was free when you set up your business but is now charging you fees for every transaction, that’s another reason to shop around. Take a look at the Current Account Switch Service, a free scheme that makes switching banks more straightforward. It could also be worthwhile comparing the perks of business credit cards to find one that offers you cashback, loyalty points or air miles – whichever will be most beneficial to you.
- Get clever with cash flow
For optimal cash-flow management, McNicholas recommends businesses invoice their customers promptly, but don’t rush to pay suppliers early. Pay on time, because you don’t want to upset your suppliers, but “keep money in your business bank account a little bit longer,” rather than in someone else’s account, he explained.
- Build your network – online and in person
For businesses keen to reduce their marketing spend but still increase sales, Morag Kelly, also a BizBritain adviser, suggests using a combination of using a combination of social media and local networking. You can learn from YouTube videos how to create your own free content, she said, recommending that businesses take time to ensure they post at the right times, and on the right platforms, to reach their target customers.
- Make ‘nearly new’ your new best friend
Business owners can make significant savings by venturing into the second-hand market. McNicholas encourages his Start Up Loan clients to ask themselves: “Do you have to buy the brand new van or the brand new piece of equipment? Can it be second-hand or nearly new?” And for businesses storing kit they no longer use, reselling those items could create a welcome injection of cash.
Make the most of who and what you’ve got
Payrolls are set to increase significantly from April 2025 as Employers’ NICs shift to 15%, at the same time as the NML and NLW increase. Companies may be hesitant to take on additional headcount, choosing instead to review the capabilities of their existing team, iron out inefficiencies in the working day and focus on retaining star employees.
“If you’ve spent hundreds [of pounds] to recruit and train staff, that’s expensive. You don’t want to lose them to a competitor,” McNicholas warned. Do a skills audit and look at where current staff members could be deployed on different tasks.
Jenn Crowther, CEO of enterprise agency Yorkshire In Business, said to keep staff costs down, she has chosen not to hire an additional trainee this year, which has saved the organisation £25,000 in salary, plus training costs. Instead, she is “embedding admin, reception work and other general duties” into the responsibilities of her “skilled staff who are self-managed”.
There are upsides to paying higher wages: Putting more money in the pockets of UK workers can benefit small businesses by helping to retain staff and boost the amount they spend themselves as consumers.
Whether you’re watching your cash flow like a hawk, embarking on a cost-cutting mission or seizing the opportunity to reward your valued employees, owners of small businesses will be hoping for greater productivity and more profit in 2025.
Image source: Getty Images
About the Author
Dive even deeper
Why Is Car Insurance So Expensive?
by Tim Leonard
Tipping in the UK: How Small Businesses – and Workers – can Benefit From the New Rules
by Sam Bromley