Employment costs and complexity

In summary

• The Business Owners Sentiment Survey shows employers pursuing several strategies to control costs
• As well as redundancies, pay freezes, hiring freezes and offshoring are all options employers are exploring 
• All come with potential risks and complexities, however, as does the use of temporary off-payroll workers, often through personal service companies, which remains a popular choice
• HMRC enforcement has been relatively light touch to date, but the risks are likely to grow 

Unemployment in the UK is at its highest in close to five years. According to the ONS, the rate increased to 5% in the three months to the end of September – the highest since February 2021. Our recent Business Owners Sentiment Survey (The BOSS) suggests that worse could still be to come. 

Asked about a range of challenges to their business in the coming year, close to four in ten of the business owners surveyed said they thought redundancies were very (16%) or somewhat (21%) likely in their business in the next 12 months.

As the survey also made clear, much of the blame for this is down to the last Budget. Asked about the impact of the increases to employer national insurance contributions in the Autumn Budget 2024, 19% said they had already reduced staff headcount, and 28% said they were planning to do so unless the Chancellor made changes to cut the costs of employment.   

Even with less than a week to go, it’s impossible to know what’s in the Budget, but it seems at least as likely to push up employment costs as reduce them. Among the many rumours circulating, including further increases to the minimum wage or NI rises, perhaps the most significant are pension changes that could see a £2,000 cap on the amount of earnings that can be sacrificed for pension contributions, or even the complete removal of pension salary sacrifice. Should these pension changes go ahead, they could result in further costs for employers with employer NI becoming due on contributions that no longer qualify for exemption.

We found a similar story for other cost-cutting measures, such as pay freezes, hiring freezes and moving jobs abroad.  

As these examples show, redundancies are far from the only options organisations are looking at when seeking to cut employment costs. Equally, though, they can’t show the complications involved.  

Some of these are more obvious than others, but they can impact all areas of the workforce. For the lower-paid but salaried workers, the relentless rise in the National Minimum Wage, combined with salary freezes, increases the risk of non-compliance with the regulations. Failure to keep track of hours worked, employer deductions or the impact of salary sacrifice schemes can easily result in inadvertent underpayments. 

For talented graduates, meanwhile, many businesses have scaled back or halted their graduate hiring programmes amid the economic uncertainty. A survey by the Institute of Student Employers in October suggested graduate hiring was down by 8% year-on-year. The cost savings, however, may come at the price of failing to recruit and develop the next generation of business leaders. At the same time as redundancies, BOSS also found concerns of skills shortages.  

Likewise, the direct cost savings of offshoring jobs are often easier to calculate than the consequences for control, quality or supply chain security. In all these cases, short-term savings can come with a long-term cost.  

The same is true for another cost-cutting measure that the survey did not explore, but which is, nevertheless, commonly adopted: an increasing reliance on temporary “off-payroll” workers, often through personal service companies (PSCs).

The changes to off-payroll working rules (IR35) in the private sector from April 2021 dramatically reduced the number of individuals supplying services to businesses through PSCs. Many employers were simply not prepared to take on the new responsibility of establishing the correct employment status of such contractors.

By the start of 2024, HMRC estimated that the 2021 reforms saw up to 150,000 people move from PCSs onto payrolls.  

However, IR35 litigation has been rare, and over time, the use of consultants, contractors, freelancers and others operating through PSCs has persisted, particularly in sectors that are highly seasonal or subject to high demand. 

That could cause problems for businesses, coming just as pressure increases on HMRC to raise revenue. Such arrangements are likely to come under the spotlight again and determining individuals’ employment status can be complicated. Questions in HMRC’s CEST (Check Employment Status for Tax) tool can be misinterpreted, even in good faith, such that reliance can’t be placed on the result.

Getting these assessments right and putting in place – or reviewing – processes and controls to ensure compliance with the rules, is only going to become more important. 

Equally, for firms paying off-payroll workers gross, any change of employment status could represent a significant cost in terms of employer NI (and the apprenticeship levy, where applicable) not to mention a potential labour shortage if contractors refuse to work as a deemed employee. 

Businesses need to keep such matters in mind. Otherwise, they risk paying a higher price than they bargained for when trying to cut their employment costs. 

Approval code: NTEH7112558