Budget cost squeeze threatens fresh wave of private care home closures

The UK Autumn Budget has intensified financial pressures on the private care home sector, already weakened by chronic underfunding and staffing shortages. Higher employer National Insurance Contributions (NICs) and a rise in the National Living Wage (NLW) will impose significant additional costs, threatening a fresh wave of closures.

Rising costs due to wage increases, inflation, reduced labour availability, as well as expenses related to rising regulatory standards, now far outpace modest rate increases provided by local authorities. Many of the UK’s 18,000 private care homes face a difficult choice: absorb increasing losses or close. The Care Quality Commission (CQC), the industry regulator, reports a national decline in care home numbers, with 39% of providers contemplating exiting the market, underscoring serious concerns over the financial viability of private care homes across the UK.

The Budget increased employer NICs by 1.2 percentage points, to 15%, and lowered the threshold for contributions to £5,000. With a 6.7% rise in the NLW to £12.21 from April, these policies place immense strain on care homes, especially those dependent on low-wage labour. Unlike public sector care homes, which are exempt from the NIC increase, private providers must fully absorb these costs, increasing the risk of closures for homes reliant on local authority funding.

While the Budget provides £600m in new grant funding for social care, shared across both adult and children’s services, care groups warn increased staffing costs will “instantly” absorb this allocation. Care England and the Homecare Association estimated a £4bn shortfall before the Budget, a figure now projected at £6.4bn, of which approximately £5bn would need to come from local authorities to sustain essential services. The Independent Care Group (ICG) has called for a social care exemption from the NIC increase or additional funds to cover mounting costs.

ICG Chair Mike Padgham highlights that closures are an immediate risk, particularly for small and medium-sized providers already financially strained by decades of underfunding. Between 2011 and 2023, 816 predominantly private care homes were closed due to failure to meet industry standards or resident needs, impacting around 20,000 residents, reports the Financial Times. Without revised Budget measures, Padgham warns of an “irreversible loss of capacity” across the sector.

Pre-existing private care home sector challenges 
The UK private care sector faces mounting pressures from increased social care demand, regulatory scrutiny, and acute staffing shortages. According to the CQC’s latest State of Care Report, ongoing operational costs have depleted financial reserves to historically low levels, leaving many providers without the financial flexibility to absorb new Budget-driven expenses or weather payment delays. Chronic staff shortages, exacerbated by an 81% drop in overseas worker visas, further limit providers’ ability to deliver essential services. The CQC also reports significant delays in hospital discharges due to limited care availability, with notable regional disparities: the North East faces high discharge delays due to inadequate home-based care, while London struggles with scarce care home placements. Limited care home capacity now accounts for 45% of hospital discharge delays, straining the NHS and underscoring the interdependence between social care and the healthcare system.

As Care England’s Chief Executive Professor Martin Green wrote: “Without the support needed, the social care sector is in unprecedented danger. As a result of this decision, we are likely to see an increase in the number of contracts handed back to local authorities by providers, closure of services that are no longer viable, and the inability for some care providers to sustain or move towards paying the real living wage.”

As the sector edges closer to a crisis point, experts argue that the government must urgently establish a sustainable funding plan to prevent the financial collapse of care homes and avoidable hospital stays for elderly patients. Successive governments have resisted comprehensive financial solutions – such as increased taxes or a social care insurance scheme for those over 40 years old – for fear of a public backlash, reports The Times. 

In light of these market pressures, private care home providers must implement disciplined management strategies to maximise operational efficiency and optimise funding sources. BTG Advisory offers expertise in financial restructuring and strategic management to help care providers stabilise operations, manage costs, and develop sustainable strategies. Our services include restructuring management, capital raising, refinancing, and business exits.

Our team can also conduct independent business reviews and advise on business model modernisation, including implementing a shift from residential to home-based care, where feasible, to lower operational costs. We are also experienced in negotiating revised funding agreements with local authorities. Working closely with providers, BTG Advisory prioritises continuity of care, preserving essential services during challenging market conditions.

If your business is affected by the Budget policies or sector-specific changes, our team at BTG Advisory is here to assist. We provide confidential support in streamlining operations, optimising service delivery, and refining capital structure and management to enhance execution and profitability. Whether your business is focused on growth, consolidation, refinancing, or divestment, we offer guidance to ensure sustainable expansion and compliance in both existing and new markets.