Employment costs to soar in beleaguered hospitality sector
Hospitality firms could be facing the most arduous financial challenges since the pandemic as worried companies dial in for advice on how to ease looming cost of business pain.
The hospitality industry, including food and beverage, accommodation, travel and tourism and entertainment and recreation, is particularly vulnerable to a range of Autumn Budget measures because of a younger workforce, recruitment problems and reliance on discretionary spending by consumers.
There will likely be a lot of cold-sweat calculations going on behind the scenes as businesses work out what their new higher breakeven will be – and what needs to be done to recoup the higher outlays from April without hiking prices for weary customers who already tightened belts when inflation hit a 41-year high just two years ago.
The increasing tax burden
In the Autumn Budget the Chancellor announced an increase in employer National Insurance Contributions (NICs); the rate of employer (secondary) contributions will increase from the current rate of 13.8% by 1.2% to 15% this April. The increase was accompanied by a reduction in the secondary threshold at which employer NICs become payable from £9,100 to £5,000 per year – this reduction in the secondary threshold alone will cost employers an additional £615 per employee.
The Employment Allowance has also been increased from £5,000 to £10,500 and the restriction which prevented employers who incurred a secondary Class 1 NICs liability of more than £100,000 will be removed, thus enabling more employers to claim the allowance and will help shield some of the smallest employers from the increases.
The table below shows the cost impact based on example salaries.
Employee Salary | Additional cost from Secondary Threshold reduction | Additional cost from rate increase of 1.2% | Additional Employer NICs payable | Percentage Increase in Er NICs |
£20,000.00 | £615.00 | £130.80 | £745.80 | 50% |
£40,000.00 | £615.00 | £370.80 | £985.80 | 23% |
£60,000.00 | £615.00 | £610.80 | £1,225.80 | 17% |
£80,000.00 | £615.00 | £850.80 | £1,465.80 | 15% |
£100,000.00 | £615.00 | £1,090.80 | £1,705.80 | 14% |
£120,000.00 | £615.00 | £1,330.80 | £1,945.80 | 13% |
£140,000.00 | £615.00 | £1,570.80 | £2,185.80 | 12% |
£160,000.00 | £615.00 | £1,810.80 | £2,425.80 | 12% |
Also going up is the National Living Wage for people aged 21 and over and the National Minimum Wage for people of at least school leaving age. The National Living Wage goes up on 1 April from £11.44 to £12.21, an increase of 77p.
With the National Minimum Wage, it will be £10 instead of £8.60 for those aged 18 to 20, a rise of £1.40, and, for under 18s, £7.55 from £6.40, up £1.15. Apprentices will also receive £7.55 instead of £6.40, up £1.15.
These increases, at the same time in as the rise in employer NICs, and higher corporation tax on profits, will quickly erode already-squeezed profit margins and could break the camel’s back for some employers.
These increases are set to cause a ‘triple whammy’ impact on employers in the hospitality sector, which will erode profits for many. Here is an example of the National Insurance (NI) cost implication for a business with 50 full-time employees on National Living Wage working 48 weeks in a year:
Total employer NI cost pre-April 2025 | Total employer NI cost post-April 2025 | Difference | Percentage increase |
£960,960.00 | £1,025,640.00 | £64,680.00 | 6.73% |
Total wage cost pre-April 2025 | Total employee NI cost post-April 2025 | Difference | Percentage increase |
£64,822.48 | £105,846.00 | £41,023.52 | 63.29% |
Total Employer cost pre-April 2025 | Total Employer NI cost post-April 2025 | Difference | Percentage increase |
£1,025,782.48 | £1,131,486.00 | £105,703.52 | 10.30% |
Mitigating the impact
Negative mitigations by businesses to reduce employment costs could include:
- Reduced hiring of new roles: For companies with significant wage bills the additional cost may lead them to reconsider creating new roles. For example, an employer with 50 employees, receiving an average salary of £50,000, will incur additional NICs costs of over £55,000.
- Recruitment freezes: Instead of filling vacant roles, businesses may require existing employees to take on additional responsibilities, increasing workloads.
- Paused or reduced benefits enhancements: Plans to improve employee benefits, such as healthcare, pension contributions or moves to a living wage, could be deferred to accommodate the rising costs.
- Restrained salary increases: Employers who had budgeted for a 4% rise in labour costs may feel compelled to reduce planned salary increases, affecting employees' earnings potential.
However, there are proactive measures employers can take to reduce the cost impacts. We estimate that companies which utilise salary sacrifice for workplace pensions, sometimes referred to as Pension Salary Exchange (PSE), can reduce the NIC impact costs by between 20% and just over 40%, depending on salary level. The sooner PSE can be introduced, the sooner the savings can begin to mitigate the impact of the NIC increase.
With PSE, the employee stops making personal pension contributions and reduces their salary to match that contribution whilst the employer increases its contributions to ensure the total amount added to the employee’s pension fund remains the same as before.
This produces NIC savings for both employer and employee, creating a rare ‘win-win’ situation of increased net pay or more into employees’ pensions and savings for the business which can be retained and/or reinvested in staff, or now used to mitigate the NIC increase costs.
Another option for hospitality businesses to mitigate the impact of the changes is using a tronc scheme. This is a pay arrangement which allows businesses to fairly share tips and service charges given by customers to staff.
The main benefit of putting a tronc scheme in place, which relates to the changes discussed above, is that it offers significant NIC savings to both employers and employees. It can also be fully independent from any interference by the employer through the appointment of a Troncmaster – an independent party appointed by a business to be responsible for sharing tips to staff via a tronc scheme.
We are here to help
Our employer solutions team can talk you through the best ways to ease the impact of these changes and help you through any challenges. We can support you with:
- Conducting a cost impact analysis of the NIC and NMW changes for businesses
- Reviewing your current business model, cost structure and policies
- Forecasting the impact of the increased costs
- Projecting savings and aiding in implementing PSE and other salary sacrifice schemes
- Helping to implement a tronc scheme, and acting as Troncmaster
- Completing an Employer Healthcheck to identify tax/cost and time/efficiency savings, making sure tax reporting obligations are being met and improving tax exemption utilisation.
If you are concerned about how the announced changes are going to affect your business or have any questions on implementing a salary sacrifice or tronc scheme, please get in touch with a member of our specialist team via the form below or contact your usual Azets advisor.
The information contained within this insight is for guidance only and does not constitute advice which should be sought before taking any action or inaction.