Last week’s Budget introduces new cost pressures for low-wage sectors through higher employer National Insurance Contributions (NICs), resulting in a disproportionate tax increase for employers of low-paid workers. Businesses will be unable to fully recoup these costs over time by squeezing wages, due to the coming rise in the National Living Wage (NLW).
In the hospitality and leisure industry, the impact of these tax changes will be “painful”, warns UKHospitality, which forecasts an increased annual tax bill of £3bn for the sector in 2025. Increased financial pressures risk depressing real incomes and further tightening labour availability, which is already strained by an ageing population and high rates of health-related inactivity.
Rising employer NICs to hit hospitality and leisure sector hard
Labour’s first Budget in 14 years aims to raise an additional £41.5bn annually by the end of the decade through significant tax increases. A large portion of this will come from lowering the earnings threshold for employer NICs from £9,100 to £5,000 and increasing the NICs rate from 13.8% to 15%. Additionally, the Budget will raise the NLW by 6.7% to £12.21 per hour starting in April 2025, translating to a £1,400 increase in annual earnings for a full-time NLW worker.
The lower NIC threshold disproportionately impacts the cost of employing lower-wage workers. According to the Institute for Fiscal Studies (IFS), the rise in employer NICs will most affect larger firms that employ low-wage workers and could lead to fewer minimum-wage jobs. For instance, the change is projected to raise the cost of employing low-paid workers by over 4%, compared to approximately 1.5% for those in the top fifth of earners. For hospitality and leisure businesses which rely heavily on low-wage employees, this brings a significant labour cost increase that many may struggle to absorb.
The Office for Budget Responsibility (OBR) forecasts that the employer NIC increase will impact wages, prices and profits unevenly, with 61% of the cost expected to reduce wages, 15% to raise prices, and 24% to lower profits. This may prompt employers to reconsider new hires and change working hours to align with revised growth expectations. However, employers in low-wage sectors may struggle to offset these costs through wage adjustments due to the increase in the minimum wage.
The Treasury projects that the NIC increase alone will raise £25bn annually by the end of the decade. However, this estimate assumes no significant behavioural changes among employers. In contrast, the IFS suggests that if businesses respond by limiting wage increases to offset higher NIC costs, the measure could raise just £16bn. This discrepancy underscores how employer cost-saving measures by lowering future wage increases could substantially reduce the actual revenue raised by Chancellor Rachel Reeves’ centrepiece policy to raise additional tax revenues to fund the government’s spending and investment programme.
Chancellor Reeves acknowledged that her policies could dampen pay growth. “It will mean that businesses will have to absorb some of this through profits, and it is likely to mean that wage increases might be slightly less than they otherwise would have been,” she told the BBC the day after delivering the Budget.
The steep financial impact of the NIC increase on low-wage roles may also influence employers’ staffing models, potentially incentivising a shift toward hiring self-employed contractors over full- or part-time employees to manage rising employment costs. This effect is expected to be particularly pronounced in the hospitality and leisure sector, where businesses must also contend with phased reductions in business rates relief, extended for an additional year in 2025–26 at a reduced rate of 40%, down from 75%, ahead of permanently lower business rates for these properties starting in 2026–27. “Avoiding the business rates cliff edge next April was critical and it was important that some relief has been extended,” says Kate Nicholls, Chief Executive of UKHospitality. “However, the reduced level of 40% is another cost that businesses have to deal with. For those small- and medium-sized operators, their rates bills will still go up in April.”
Recovery signs in hospitality and leisure niches
These tax changes introduce considerable new financial headwinds for hospitality and leisure businesses already grappling with tight margins, rising operational costs, shifting employment patterns, and evolving consumer behaviour trends that are reshaping how people spend their free time and discretionary income. For many in the sector, these changes add cost burdens that could hinder a tentative recovery.
Several submarkets within the hospitality and leisure sector are showing early signs of recovery, particularly those capitalising on the consumer shift toward experiential spending. Competitive socialising venues, such as bars with activities like mini-golf and axe-throwing, are performing well at the expense of traditional passive entertainment venues like cinemas. This trend is evident in Guinness World Records’ plans to invest £50m to open an entertainment venue in London by 2026, tapping into the popularity of casual sports and interactive entertainment. By contrast, cinemas are struggling; Cineworld, for example, recently avoided administration by a court-approved restructuring. Cineworld, whose landlords include British Land, Land Securities and Legal & General, continues to struggle with rising operational costs exacerbated by the Budget increase in the NLW and declining attendance, underscoring the challenges faced by legacy entertainment venues.
Legacy hospitality venues looking to rebound
Many hospitality and leisure businesses are still striving to recover amid increasing competition from new entrants that are better aligned with shifting consumer preferences. While some legacy businesses have adapted, others face challenges to stay relevant within a market that increasingly favours experiences over traditional formats. For instance, casual dining chain Prezzo has undergone major restructuring since it was rescued from administration by private equity firm Cain International, closing a third of its loss-making restaurants after rising costs made trading “impossible”. Revolution Bars Group, which operates 80 hospitality venues across the UK, has also shown resilience, returning to profitability after a difficult year that saw the suspension of share trading on AIM after it failed to publish its results, and a rejected takeover attempt by Nightcap, which owns the Barrio and Blame Gloria chains. Ultimately, a successful restructuring plan – which included raising £12.5m in emergency funding – prevented the business from collapsing. To mark the pivot, Revolution Bars, which owns UK pub and bar brands Revolution, Revolución de Cuba and Peach Pubs, changed its name in mid-October to The Revel Collective. Elsewhere, budget gym chain Gym Group has rebounded more quickly than much of the broader sector, reporting its first pre-tax profit in over four years.
These examples illustrate the mixed fortunes within the sector, where adaptability to new consumer demands is essential. Businesses that modernise traditional formats to align with shifting consumer trends across the hospitality and leisure sector will be better placed to absorb the increased financial pressures stemming from the Budget. However, legacy businesses with traditional models may find it harder to sustain recovery momentum as they face both shifting consumer tastes and the added burden of recent tax increases.
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.
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