With increases in National Insurance Contributions (NICs) and the National Minimum Wage, employers will face higher payroll costs, squeezed margins, and difficult decisions on pricing and staffing.
These changes, announced by Rachel Reeves in October 2024, as part of her Autumn Budget, come at a time of rising costs and market consolidation in the fuel sector. In an industry where margins are tight, the impact could be significant – but government mitigation measures, such as an increased Employment Allowance, may provide some relief.
Employer NICs increase from 13.8% to 15% from April 2025, meaning businesses will pay more per employee in payroll taxes. The threshold at which NICs apply is also dropping from £9,100 to £5,000, meaning more of each employee’s salary will now be subject to NICs.
These changes may significantly impact smaller businesses. With many of those in our community falling into that bracket we consider the potential impacts on fuel distributors of these changes.
Key changes
National Insurance Contribution changes
- From April 2025, employer NIC rate rises by 1.2 percentage points, bringing it to 15%.
- Lowered Earnings Threshold: Decreases from £9,100 to £5,000.
Revised wage rates
National Living Wage (21 and over): Increase of £0.77 to £12.21 per hour, a 6.7% rise.
- 18-20 Year Old Rate: Increase of £1.40 to £10.00 per hour, a 16.3% increase.
- 16-17 Year Old and Apprentice Rate: Both increase by £1.15 to £7.55 per hour, an 18% rise.
These changes are likely to have several implications for smaller distributor businesses:
Increased operational costs: Fuel distributors already face rising costs, from fluctuating fuel prices to vehicle maintenance and insurance. With the increase in NICs and wages, a company could see a significant increase in annual payroll costs.
For smaller distributors, this could force difficult decisions:
- Reduce workforce or driver hours to control costs
- Pass on higher prices to customers, potentially impacting competitiveness.
- Absorb the costs, further tightening already slim margins
Some experts believe that the National Insurance increase will not only have a detrimental effect on businesses – but also on workers. Businesses may become more cautious about hiring new staff or expanding operations, potentially hindering growth, and may even consider reducing their workforce.
Simon Gleeson, a Partner at business advisory firm Blick Rothenberg, said: “Employers National Insurance increase of 1.2%, whatever Rachel Reeves says, is a tax on jobs – small business will have to pass this on as they are mostly operating on razor thin margins – either salaries or job numbers will fall, or prices will rise to cover the cost. This will hit the working people where it hurts.”
Impact assessment
To consider the potential impact here is an example calculation for a ‘typical’ smaller fuel distribution business with 9 employees and annual wage bill of around £350,000
Prior to April 1st 2025
Employer NIC threshold: £9,100 per employee
- NIC applies to: £350,000 – (£9,100 × 9) = £268,100
NIC at 13.8%
- 13.8% of £268,100 = £36,799.80
From April 1st 2025
NIC increases to 15% and Employer NIC threshold reduces to £5,000
- NIC now applies to: £350,000 – (£5,000 × 9) = £305,000
- 15% of £305,000 = £45,750.00
Impact summary
With NIC increased to 15% and the threshold reduced to £5,000, the business in our example would pay around £8,950 more per year in staff costs before any minimum wage impacts.
Mitigation
The government has introduced measures intended to mitigate these impacts:
Increased Employment Allowance: The Employment Allowance rises from £5,000 to £10,500, providing eligible smaller businesses with some relief by reducing NIC liabilities for those distributors and offsetting increased costs.
The increased allowance helps offset the impact on payroll of the increases in Employer NIC and National Minimum Wage.
The increase is a crucial support measure for small and medium-sized fuel distribution businesses – in our example it reduces the annual impact of April’s changes to around £3,450.
Potential benefits
Easing recruitment challenges
Recruiting and retaining skilled staff is becoming increasingly expensive. The higher allowance effectively lowers the cost of employment, making it easier to:
- Hire additional drivers or support staff
- Offer competitive wages to retain staff
Maintaining competitive pricing
The NIC relief enables businesses to absorb some of the increased operating costs, reducing the pressure to pass them on to customers.
For small and medium-sized distributors, the allowance will be crucial to offset rising payroll costs, invest in staff, and maintain competitive pricing while protecting margins and supporting long-term business growth.
It is applied automatically, via payroll, once claimed by a qualifying business.
Managing costs
While the increased Employment Allowance will offer some respite, businesses must consider the need to manage rising costs effectively through strategies such as:
- Reviewing staffing costs and considering efficiency improvements
- Exploring ways to further optimise operations such as through greater automation of digitalisation
- Adjusting pricing models to maintain competitiveness
As the industry navigates these changes, staying proactive will be key to maintaining profitability and business sustainability.
Image credit: Dreamstime
