A Hidden Tax On Growth: The Burden Of Rising NICs On Small And Medium-Sized Enterprises

The UK government’s recent increase in employers’ National Insurance Contributions (NICs) has sparked significant concern among business leaders—none more so than those at the helm of small and medium-sized enterprises (SMEs).

While policymakers may view the rise as a necessary step to support public services and fund social care, for SMEs, it represents yet another hurdle in an already challenging business landscape.

Often operating on tighter margins, with limited financial buffers and fewer options for cost-cutting, SMEs are bearing a disproportionate share of the burden—what many now consider a “hidden tax” on growth and innovation.


What Changed With Employers’ NICs?

As of the most recent reforms, the rate of employer NICs rose from 13.8% to 15% - a 1.20 percentage point increase. On paper, that might not seem like a dramatic hike. But in practice, it translates into a significant cost increase for every salaried employee earning above the threshold – the expense of which can be calculated via useful online tools.

For larger businesses with deep pockets and broad payrolls, the additional cost can be absorbed or redistributed more easily. For SMEs, however, every extra pound paid to the taxman is a pound not reinvested in staff, product development, or marketing.


The Financial Squeeze On SMEs

For most SMEs, payroll costs are already one of the largest line items on the balance sheet. The increase in NICs hits hard, especially at a time when inflation is driving up costs across the board—from raw materials to energy bills. For businesses that are just recovering from the aftershocks of Brexit, COVID-19 lockdowns, and disrupted supply chains, the added pressure is unwelcome.

Many small business owners find themselves in an impossible bind: raise prices and risk losing customers during a cost-of-living crisis, or absorb the cost and risk their financial health. Either way, margins shrink, and the business becomes more vulnerable.


Impact On Hiring And Staff Retention

Perhaps the most immediate consequence of the NIC hike is the chilling effect on hiring. Many SMEs are slowing recruitment, freezing open roles, or even considering redundancies. The decision isn’t necessarily one they want to make, but one they’re forced into by financial reality.

Moreover, the increase creates a disincentive to offer pay raises—even when employees deserve them—because every raise comes with an increased employer NIC liability. This tension can cause resentment and disengagement within teams, damaging morale and retention.

In some sectors, employers are getting creative—or desperate. There's been a noticeable uptick in businesses outsourcing work to freelancers or contractors, who may fall outside the PAYE system and thus reduce the overall NIC burden. While this can save money in the short term, it can also lead to fragmented teams and a loss of in-house knowledge and culture.


Disproportionate Impact Compared To Big Business

The structure of the NIC increase fails to account for the fundamental difference between SMEs and large enterprises. Larger firms can leverage economies of scale, optimize their workforce globally, and access capital more easily. SMEs, on the other hand, are local, lean, and deeply embedded in their communities. They tend to invest more of their earnings directly back into the business, into jobs, or into local supply chains.

For a multinational corporation, the NIC hike is a manageable cost of doing business. For a five-person bakery, a ten-person IT consultancy, or a thirty-person engineering firm, it’s the difference between growth and stagnation.


Stifling Innovation And Long-Term Growth

SMEs are often touted as the engine of the UK economy—responsible for over 60% of private sector employment and around half of turnover. They are also where much of the country’s innovation, agility, and entrepreneurial spirit live. When these businesses are forced to divert funds to cover rising NIC costs, their ability to invest in R&D, training, technology upgrades, or expansion is compromised.

Over time, this risks eroding the UK’s competitiveness and productivity at a macro level. It also runs counter to the government's own ambitions to create a high-growth, high-wage economy.


Calls For Reform And Support

Business groups including the Federation of Small Businesses (FSB) and the British Chambers of Commerce have called on the government to revisit the NIC increase or offer targeted relief for SMEs. Suggestions have ranged from increasing the Employment Allowance (currently £5,000) to offering NIC rebates for new hires or green job creation.

There’s also a push for more nuanced tax policy—one that recognizes that not all employers are created equal and that growing a sustainable economy means investing in the businesses that form its foundation.


A Tipping Point For Many?

The increase in employers’ NICs may have been introduced with the goal of stabilizing public finances, but for many SMEs, it feels like the last straw. Already battered by years of economic uncertainty, they now face an uphill battle to maintain staffing levels, reward their teams fairly, and continue to grow.

If the UK wants to foster a thriving, innovative economy, it must be careful not to strangle its most dynamic contributors with costs they can’t shoulder. A tax that discourages hiring, investment, and expansion is, by any other name, a tax on growth.

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