NI Increase: How can recruitment organisations prepare for this change?

APSCo recently attended a webinar by Workwell Outsourcing ‘Preparing for Change: The Impact of the NI Increase for Recruitment Leaders’ which had some great insights into how recruitment businesses will be impacted by this change and how they can mitigate the increased costs. The webinar was hosted by a specialist panel: Hannah Mollison, Sales Director at Workwell Outsourcing, along with Managing Director, Yves Bizimana and Matthew Jacques, Finance Director for Workwell Group. 

Before taking a deeper dive into the potential impact of the increase, we thought we’d start off by introducing the new legislation. 

What is the NI Increase?

The October 2024 Budget, delivered by Chancellor Rachel Reeves revealed significant changes to National Insurance contributions which will impact all businesses, effective from April 2025. These changes include: 

• Increased National Insurance Rate: Employers' National Insurance contributions will rise by 1.2 percentage points, from 13.8% to 15%.  

• Lowered Threshold: The earnings threshold at which employers start paying National Insurance will decrease from £9,100 to £5,000 per year.  

These measures are projected to raise £25 billion annually by the end of the forecast period. In a bid to support smaller businesses, the Employment Allowance will increase from £5,000 to £10,500, allowing eligible employers to reduce their National Insurance liability.  It will be vital for businesses to assess the financial impact of the new regulations and consider strategies including salary sacrifice schemes, reviewing employee benefits and boosting operational efficiencies to lessen the impact of the increased costs. 

Key takeaways

National Insurance Threshold: The key change is that the National Insurance threshold is decreasing to £5,000, meaning businesses will start paying contributions sooner. This isn’t just about the increase to 15% - it’s also about paying that higher rate at a lower earnings level, which significantly impacts costs. 

1. Gross Profit: For recruitment businesses, especially those placing contractors, temps, or using umbrella companies, this will directly affect gross profit (GP). With payroll costs rising, GP will shrink.  Businesses must carefully consider how this affects pay rates, as any increase in employer costs will need to be factored into budgets and financial projections. We’ll discuss ways you can mitigate the increase in costs below. 
2. Sectors likely to be impacted most: The panel said that businesses within healthcare, construction and blue-collar industries could be the most impacted by the increases. The reason being is that this particular type of work tends to have thin margins so they would need to be planning for the impact of the NI increase.  
3. Legislative costs and contractual obligations – are you covered? 
   The discussion then went to contractual obligations, and whether your contract accounts for the costs of these legislative changes – the consensus being that it is essential to communicate proactively to minimise potential disputes. These are the key steps to follow: 

• Firstly, checking whether your contract covers these legislative changes and that the increase in the cost will be passed to the end client. If so, Step 1 would be to have a conversation with the customer to remind them of legislative changes clause in the contract. 

• We then need to look at how we can approach these conversations. If it’s in the contract, just a conversation would be sufficient, then following up to ensure its documented is key.  

• If it is not included in the contract – it is important to initiate the conversation as soon as possible to ensure a smooth transition before the changes take effect in April. 
  
  

What other methods can recruitment businesses look at to mitigate the changes?

Many agencies understand that umbrella companies can be both an asset and a challenge, but ultimately, someone has to bear the cost. If the client is unable to absorb these costs, engaging in discussions with the umbrella company can help to mitigate the expense – particularly true when dealing with minimum-wage workers. A key takeaway: to protect both your business and your workers, always ensure you are partnering with fully compliant umbrella companies. 

Salary Sacrifice Scheme  

Following the increase, salary sacrifice could be a potentially big advantage to employers. The scheme allows employees to contribute to their pension scheme in exchange for a reduced salary, leading to savings on National Insurance for both the employer and the recruitment organisation. The scheme is also applicable to all employees - accessible to anyone with a pension scheme. If companies take part in this scheme, it is vital that contracts are updated accordingly to ensure compliance and that employers ensure salary reductions do not bring employees below the National Minimum Wage.  

Consulting payroll and admin professionals will help implement salary sacrifice correctly and maximise its advantages. 

Incentivisation for the highflyers in your company 

Another effective way to reduce NI costs while rewarding the highflyers in your company is by reconsidering how bonuses and incentives are structured. Exploring share schemes could be a good start, as traditional monetary bonuses often come side-by-side with higher NI costs for employers. Equity-based reward schemes can offer long-term benefits, without the worry of NI costs. It can also offer a way to retain your organisation’s top talent by aligning their success with the company’s growth.

Share schemes are a complex area but definitely worth looking at, in terms of both saving on NI costs and also as a way to retain high flying employees by offering them a stake in your business. 

The session then looked at other ways to mitigate costs of the increase... 

1. People are your biggest cost – Salaries, commissions, and benefits make up the largest portion of a recruitment organisation’s expenditure. Looking at employee incentives as we mentioned above can help to mitigate these costs and improve benefits for your employees. 
2. IT Costs – Managing multiple software systems can lead to inefficiencies and higher expenses. 
3. Funding Costs – If you rely on external funding, ensuring you have the best possible financing arrangements is critical. 

Here are some things to think about:  

• Optimising IT and technology integration: A lot of recruitment organisations pay for separate systems that do not work with each other, which can lead to inefficiencies, increased administrative tasks and training for employees to learn different systems, and higher costs. Streamlining IT by using a single provider and moving to an integrated platform can not only reduce costs but improve operational efficiency. A provider that offers a complete tech ecosystem, including CRM, accounting software, and payroll solutions, can enhance business performance and free up valuable time and resources. 
• It is also important to not only focus on your CRM system which is often the priority for managing clients and candidates. Back-office functions such as payroll and invoicing can often be neglected, which has the result of cash-flow issues and delays in invoicing and collections.  
• Reviewing your funding strategy: One of the most critical areas for recruitment businesses, agencies should be regulary reviewing their funding arrangements to ensure they are getting the best rates possible. It could be an option to explore alternative funding models or switch to a new provider, which could in turn lead to significant savings. 
• Make sure you are aware of the Employment Allowance: The government’s increase of the employment allowance from £5,000 to £10,000 means that many organisations can benefit from a substantial cost reduction. If you haven’t already checked, now is the time to check-in with your payroll provider if your business is already claiming this allowance. 

Final takeaways 

With the NI increase soon coming into force, it is the prime opportunity to review your operational costs – which can bring benefits regardless of the impact of legislative changes. By optimising technology, improving funding arrangements, making use of available schemes and allowances and ensuring contracts cover what you need, recruitment businesses can ensure they are set up for success in 2025. 

Big thank you to Workwell (tag their profile) for hosting this great session and providing key insights so recruitment organisations can get prepared for the upcoming legislation.