The national minimum wage (NMW) increased on April 1st, 2025. While the NMW increase will benefit employees, how will it affect businesses in the UK?
For many small and medium-sized enterprises (SMEs), the rise in NMW will cause some concern due to the higher labour costs. To learn more about what the NMW increase means for SMEs, continue reading.
What Does SME Stand For?
SME stands for ‘Small and Medium-sized Enterprise’. A business is considered an SME when it meets criteria regarding the number of employees it has (typically under 250), and its annual turnover. SMEs play an essential role in the UK economy, providing many job opportunities for UK citizens.
According to recent statistics:
- SMEs employ 59.9% of the UK workforce
- SMEs are responsible for over half of the country’s turnover
- England has the highest percentage of SMEs (87%) in the UK
- 27% of SMEs are concerned about retaining staff in 2025
The NMW Increase
The NMW increase, first announced during the Autumn Budget in October 2024, has finally come into effect. Wages across the UK have now risen, all thanks to the government’s commitment to improving overall living standards and ensuring fair pay to those on an NMW income.
Current NMW rates:
| Age Group | Hourly Rate |
|---|---|
| 21 and over | £12.21 |
| 18 to 20 | £10.00 |
| Under 18 | £7.55 |
| Apprentice | £7.55 |
Previous NMW rates:
| Age Group | Hourly Rate |
|---|---|
| 21 and over | £11.44 |
| 18 to 20 | £8.60 |
| Under 18 | £6.40 |
| Apprentice | £6.40 |
It was estimated that roughly 1.9 million workers were paid at or below the NMW in 2024. So, the yearly NMW review and update comes as good news to many workers. However, the news might not be taken so well by SMEs across the UK due to the change in costs, including National Insurance contributions.
Are National Insurance Contributions (NICs) Increasing?
Yes, NICs have increased alongside the NMW from 13.8% to 15%. For SMEs, this isn’t great news. With the NMW having already increased, higher NICs are set to cause more potential financial issues.
Figures regarding the NICs increase show:
- The rise in NICs will lead to a 60% tax increase for businesses
- 2025 will be the most expensive year on record for businesses that employ workers on NMW
- In 2024, an employer paid roughly £1,617 in NICs for each full-time employee on NMW, whereas they’ll now have to pay £2,583
How Will NMW Impact SMEs?
The NMW will impact SMEs in the UK. SMEs operate on tighter profit margins compared to companies operating on a larger scale, meaning the wage increase could affect them significantly.
However, with all potential challenges come some positive effects. While most SMEs will face a few issues regarding the rise in NMW, the increase could be beneficial. Let’s explore how the NMW will have an impact on SMEs:
Pros
- Improved employee retention
- Lower recruitment costs
- Increased employee motivation
- Better business image
- Positive reputation
Cons
- Increase in payroll costs
- Industry-specific challenges
- Less funding to reinvest in the business
- Increased product or service pricing adjustments
- Fewer funds for hiring opportunities
The bottom line is that the NMW has risen regardless of the struggles some SMEs face. This means that for many small and medium-sized businesses, adjusting to the NMW increase is unavoidable.
How SMEs Can Adjust to the NMW Increase
Adjusting to the NMW increase may seem daunting, but it doesnt need to be. With the right help and guidance, your SME should be able to transition into this period of rising costs. SMEs should consider:
- Changing staff hours
- Changing operating hours
- Reviewing budgets
- Adjusting pricing
- Cutting expenses
- Streamlining processes
- Hiring an accountant
Do SMEs Have to Pay the NMW Increase?
Yes, SMEs are legally obliged to pay the NMW increase to their employees. If your SME fails to pay the correct wage in line with the NMW increase, it’ll be considered a criminal offence.
If employees on NMW suspect that they’re being incorrectly paid, they could report your SME to HMRC. Employers are responsible for keeping the correct records and ensuring their staff are being paid properly – something that an accountant tends to help with.
Should SMEs Hire an Accountant to Tackle the NMW Increase?
Yes, SMEs should hire an accountant to tackle the NMW increase. Although hiring an accountant does come at a cost, it minimises costs in the long run. Accountants can help tackle the NMW increase and ensure SMEs remain profitable and keep on top of their finances over the current tax year.
With a trusted accountant to hand, financial planning, forecasting, and payroll adjustments will be handled accurately. Accountants also ensure compliance with the likes of HMRC, which prevents fines or penalties being issued.
Key Takeaways
- SME stands for ‘Small and Medium-sized Enterprise’
- SME has increased to £12.21 for 21-year-olds and over
- All SMEs must legally increase their staff wage
Support for SMEs at LJS Accounting Services
At LJS Accounting Services, we offer expert support for SMEs in the UK. We understand how frustrating it can be as an SME to have to replan your finances and think about cutting costs. With assistance from our highly experienced team, we can work together to tackle payroll changes and plan financially for the tax year ahead.
We’ve been trusted for over 10 years, and all for good reason. You won’t have to worry about saving time to calculate tax or National Insurance deductions – we will do it for you. This means more free time to focus on other important areas of your business.
If your SME requires assistance in navigating the current wage change, please contact us today. We look forward to speaking with you!
Keli Evans, Director at LJS Accounting Services, excels in taxation and statutory accounts. With a focus on strong client relationships, she leads a diverse portfolio, overseeing vital financial aspects like VAT, payroll, pensions, and taxation with a holistic and committed approach.
