Increased employment costs big challenge for firms in 2025 - Grant Thornton

New research from Grant Thornton shows that increasing employment costs announced in the October Budget are one of the biggest challenges for businesses heading into 2025.

The research surveyed 800 UK businesses in December last year, just weeks after the Chancellor's Autumn statement, which set out increases to employer National Insurance contributions and the National Minimum Wage.

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Over half (52%) of businesses surveyed now expect that they will have to reduce hiring or cut jobs and offer reduced or no pay increases and bonuses to their employees, the survey showed.

Two thirds (66%) also plan to review their employee benefits offering, with 16% expecting to reduce their investment in employee reward and benefits over the next six months.

The research also showed that medium-sized businesses are more affected by these changes than larger businesses. More medium-sized businesses plan to cut jobs (55%), freeze or reduce hiring (55%) and pass on cost increases to customers (56%), compared to their larger counterparts (42%, 43% and 47% respectively).

Despite planned changes to try and manage costs, medium-sized businesses’ confidence in their profit growth remains subdued and has dropped significantly compared to February, down 21pp, the survey also showed.

Almost half of the medium-sized business respondents (43%) now expect their profit levels to decline over the next six months. This contrasts to the profit growth expectation of large corporates - where only 26% of respondents expect profits to decline.

Schellion Horn, head of economic consulting at tax and advisory giant Grant Thornton UK LLP, said: "Our previous Business Outlook Tracker was undertaken just before the Autumn Budget, at a time when the Chancellor was looking to manage expectations around the fiscal challenge ahead so as not to cause too much market instability on Budget day.

"It might have been expected that business confidence in the economy, investment potential and profitability would rebound after this - however that’s proven not to be the case.

"Our research indicates that the changes to employer’s National Insurance contributions and the National Minimum Wage announced in the Budget have hit businesses hard across the board - but particularly small to medium sized businesses.

"After the last few years of having to manage costs due to high inflation, wage growth and rising interest rates, just when there is light at the end of the tunnel, the market is now faced with further cost increases and the likelihood of interest rates staying higher for longer, he added.

"Many of the businesses surveyed are looking to pass on at least some of these cost increases to customers.

"This will put pressure on inflation and keep interest rates higher for longer, which in turn will place more pressure on business costs."

Horn explained that in practice, many firms- particularly those in the mid-market with less market power - will be unable to pass through all cost increases and will need to resort to other measures to manage cost pressures.

"The Bank of England has now also downgraded its 2025 growth forecasts and warned that interest rates will fall more slowly than anticipated," he added.

"With this in mind, the focus for businesses of all sizes, but particularly smaller to medium-sized, will continue to be managing costs and streamlining efficiencies where possible.

"For those looking to access new funding, staying on top of the available grants and investments, such as from local councils, and taking advantage of them where possible could make a real difference to those looking to offset the impact of ongoing cost pressures."

Charlotte Anderson, practice lead for Grant Thornton UK LLP in Cambridge, Milton Keynes, and Chelmsford, also noted: "All of these changes exist within a context of where there is still a battle for attracting and retaining talent.

"While employers should ensure that they're doing everything they can to keep costs down, offering a competitive reward and benefits package is still essential.

"A comprehensive review of benefit costs to ensure best value is achieved from insurers will help ensure they’re maximising the return on any spend and help businesses to both manage increases and continue to recruit high-quality employees."