What do National Insurance changes mean for the retail sector?

Mark Collins, our Retail & Consumer Goods Lead, considers the potential impact of the increases in NI payments for retailers.

Well, we all knew it was coming for a while, but now it’s a reality. In last autumn’s budget, Chancellor Rachel Reeves confirmed that from 6 April 2025, employers’ NICs would increase from 13.8% to 15%, with the threshold at which businesses start paying these reduced from £9,100 to £5,000 a year. That might not sound like a huge jump, but it will certainly have a big impact – particularly on small and medium organisations (SMEs). Employer NICs per minimum-wage employee, who of course make up a large proportion of retail workers, has risen from £1,687 to £2,513 per year.  

For sure, the change in NICs is a hot topic in my sector at the moment, so I wanted to break down just what we might see in terms of the impact, and what retailers and professionals alike can do to weather the oncoming storm.

What will happen?

Just some of the likely effects of the increase in NICs for retailers include:

• Increased cost burden

An obvious point, but it’s worth highlighting especially for smaller businesses with tight margins.

• Recruitment and retention issues

If NI eats into payroll budgets, businesses may find themselves constrained in terms of salaries they can offer to potential new hires. Similarly, they may not be able to offer pay rises to current staff, which could lead to established talent looking for work elsewhere.

• Strategic setbacks

Organisations might have to put plans for expansion, digital transformation, and investment in training or tech to one side as they negotiate the increased NICs burden.

• Competitive disadvantages

As mentioned above, the hike in NICs will hit SMEs disproportionately. Larger organisations are better placed to absorb the extra cost.

What does this mean for different kinds of retail businesses?

The picture could look very different across different divisions of the industry, meanwhile. A lot will come down not just to the size of the organisation, but its business model, margins, staff, and consumer behaviour.

• Grocery

If one area of retail could be considered recession-proof, surely this would be it. We all need to eat, after all! Larger supermarkets tend to have more automation and greater scale, making it easier to absorb rising costs across the business. However, large staff numbers still mean that increased NICs will add up. Many supermarkets are already under pressure to hold down prices after the past few years of high inflation and the cost of living crisis, so I expect we will see a growth in own-label, value-range products and discount chains as supermarkets fight to hold on to their razor-thin margins. There could also be a squeeze on mid-market brands like Tesco and Sainsbury’s, boosting prospects for budget supermarkets such as Lidl and Aldi.

• Fashion

Recent growth in GDP and lower inflation have been pleasant surprises for Rachel Reeves, but clothing retailers still tend to suffer when consumer confidence is low. I expect that National Insurances changes will see clothing companies – already under pressure in high-rent areas – try to reduce costs even further, which could lead to staff cuts and/or store closures. As ever, small and medium-sized brands will suffer the most.

• Online retailers

Businesses that transact online predominantly seem to be at an advantage, at first glance. They are more scalable, and less dependent on physical staffing. Many online businesses have strong data and automation capabilities also, further reducing costs. All that said, however, no organisation will escape the new changes unscathed – and for online businesses, their warehousing and customer service teams in particular might bear the brunt of any potential staff cuts. It’s worth noting, too, that much will depend on the company’s area of business; non-essentials like luxury, tech, and lifestyle retailers will likely feel the pinch that bit more as consumers continue to cut back.

• Health & Beauty

Health products are of course essential goods. And, for all my chat about non-essential sales slumping in tough times, beauty products are often an exception. Sales frequently remain resilient, with consumers viewing them as more viable ‘treats’ than food or clothing. Companies in this sector might have lower staffing levels than supermarkets, but pharmacies and salons will still feel the pinch – not to mention independent and boutique retailers. We will likely see a downturn in the luxury market as shoppers explore more affordable options.

What could the changes mean for recruitment and talent?

These are just a few areas of retail that will be affected. What happens to workers currently in the sector remains to be seen, but I think it’s safe to assume that many retailers will freeze hiring and delay or cancel salary rises and bonuses. Many workers in roles such as warehouse workers, delivery drivers, and floor staff will likely see a reduction in their hours, if they are not let go outright. Many head office roles won’t be safe either, especially in struggling subsectors.

Put simply, I think it’s probable that many retailers will struggle to attract and retain talent as the market constricts. This, in turn, is likely to have a negative effect on employee morale and productivity. It’s not just a problem for industry, either. There will be knock-on consequences for retail consultancies too – not only do businesses providing these services face higher NI costs as well, but their clients will cut back on paying for them.

What can retailers do?

In my last article, I discussed the bleak outlook for the retail sector this year. While 2025 still looks set to be tricky, does the boost in GDP and lower inflation signal rising consumer confidence? Let’s hope so – after all, that’s what keeps the sector going.

In the meantime, there is no way around the hike in NICs for retailers – but are there ways for organisations in retail to mitigate the worst effects? Of course there are. As they say, never let a good crisis go to waste!

As a first port of call, I’d advise retailers to consider any areas that might be easy wins for operational efficiency. Supply chain, energy usage, rent, and tech stack subscriptions are essential for strong performance, but could your organisation make changes in any of these areas to cut costs? It might be worth thinking about.

Separately, now might seem like an odd time for extra investment – but I hear so much about AI and automation from my network that any company not giving serious time and effort to these areas today risks being left behind tomorrow. It will pay dividends and boost productivity across various areas like self-checkouts, warehouse robotics, and demand forecasting.

In a similar vein, upskilling current staff where possible could help to fill capability gaps at a time when hiring is difficult. Not only will your teams be more agile, but it could also help with morale – workers naturally like to feel valued and that their employer is investing in them, especially in lean times. As such, it could also be useful to revisit your pay and benefits strategy – if your organisation can’t offer pay rises and bonuses amid the rising NI costs, are there other ways you can compensate your workers? Offering more flexible hours, extra days off, salary sacrifice and incentive schemes could go a long way. No matter what’s best for your business, effective communication is key. Talk to your staff regularly about cost pressures and any upcoming changes to show you value transparency and want to keep them included and informed.

What about talent?

Main rates of NI and income tax have not gone up for workers, but many people will be liable for more tax overall because the points at which you start paying or move to higher rates haven’t matched inflation. More broadly, it is obviously a hugely uncertain time for the market and hiring is likely to take a hit – but in the meantime, there’s still plenty that talent can do to make sure they stay learning and primed make the most of their opportunities.

Now more than ever, it’s important to position yourself, as much as possible, as a value add to your business. Take note of your results and think about ways of adding tangible metrics to what you do at work. Above all, be adaptable and proactive about upskilling, especially if your company does not seem to be providing extra opportunities for training. Be open-minded about new things too. Adaptability is so valuable, especially in tough times. There could be opportunities at work that you didn’t know about!

A final word on National Insurance changes

I am sure plenty of businesses across UK retail are feeling nervous about the new NI rates, and it will take time before we know the full extent of their effects on the market. In the meantime, I am always available for advice on optimising talent strategy for retailers, or to provide advice for talent across industry and consultancy alike. Don’t hesitate to drop me a line!