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Date:

December 5, 2025

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How will the National Minimum Wage rise impact SMEs?

In October 2024, the Low Pay Commission (LPC) recommended a 6.7% increase in the National Minimum Wage. This increase is in effect since 1st April 2025. The minimum wage increase 2025 is set to affect all the major economic sectors.

Employing 59.9% of the workforce of the UK workforce, SMEs are going to be one of the most impacted sectors. Here is everything you need to know about this impact.

What is the National Minimum Wage?

The National Minimum Wage is the basic hourly rate that employers are supposed to pay. The purpose of setting it is to get fair compensation for the workers. In 2025, minimum wage increase UK has changed things. To stay abreast of similar changes in financial world check out our guide for tax year updates 2025-26.

Reasons for the 2025 minimum wage increase 2025:

The minimum wage increase 2025 came about for following reasons:

Living costs:

An increase in the national minimum wage guarantees at least a minimum living standard. This is more important when housing, food, and utility costs are rising.

Growth of Economy:

A higher minimum wage can increase purchasing power. This, in turn, can boost the economy.

Reduction of income inequality:

There is a disparity in the highest and lowest incomes in society. Setting a minimum wage reduces this gap.

“We have argued elsewhere, the effect of the minimum wage on employment represents only one piece of the analysis necessary to assess whether minimum wages are a useful policy tool for improving the economic position of those at the bottom of the income distribution—which is the ultimate goal of minimum wage policy.”
David Neumark

The minimum wage increase 2025

Here are the new wages after the minimum wage increase UK.

Target to be achieved by the increase:

The National Minimum Wage rise 2025 will make it two-thirds of the National Living Wage (NLW) by October 2025. Another reason is leading more jobs to the NLW. So, around 2.2 million jobs are expected to fall under NLW. About 2.2 million jobs are about to be led to NLW in 2025. This is 7.3% of the total jobs and exceeds the peak of 2016.

Understanding the SMEs

SMEs stand for small and medium enterprises. The following two factors determine if a business is an SME:

Number of employees(should be 250 or more)
Annual turnover

27% of the SMEs are concerned regarding employee retention after the minimum wage increase 2025.

Impact of national minimum wage increase UK

The minimum wage increase 2025 will affect SMEs in a variety of different ways. The impact of rising national minimum wages will have far reaching consequences. Especially when it comes to small business expenses. Some of these ways may include:

Labour expenses:

Labour costs will be affected the most by the UK minimum wage increase. Even though the increase is less than the last 2 years (10%), this coincides with an increase in National Insurance Contributions(NIC). The employers have to pay NIC for 16-hour jobs too now since the salary threshold has dropped from £9,100 to £5,000 per year. The 16-hour jobs, thus, will see a larger increase in employment costs. The 38-hour jobs will see a relatively smaller increase. SMEs might have to revise their budgets to account for these increased wage costs.

Profit margin pressure

Profit margins for SMEs might reduce. This in turn is going to impact sectors like the following:

1. Industries with cutthroat competition:

SMEs that operate in such industries will face challenges. This is due to their budget being spent on wages.

2. Industries with thin profit margins

These industries include:

Retail
Hospitality
Cleaning sector

These employ the most minimum wage workers but have already thin profit margins. The national minimum wage rise 2025, may affect them more than the other industries.

Adjustments in prices:

After the minimum wage increase 2025, SMEs will have to look for ways of accommodating the higher pays.Often, they adjust this in the pricing of their product or services. This might cause an issue in retaining clients. Careful consideration should be provided while making these increases.

Reduced staffing:

The minimum wage increase UK can lead to SMEs reducing their employees. This, in turn, can affect productivity. Customer service can also be impacted by this decision. SMEs should consider the impact before taking these measures.

Changes in business model:

One of the impacts can be a change in business model for some SMEs. They might need to do any of the following:

Explore new markets
Diversify products
Adjust operating hours

To know more about the finances of your business

Strategies for SMEs:

Businesses can brace for the UK minimum wage increase 2025 using the following strategies:

1. Streamline operations:

SMEs should streamline operations in a way that increases productivity. This includes:

Improvement in processes
Training workforce
Upskilling the employees
Better scheduling

2. Exploring Technology:

Another solution to the national minimum wage rise 2025 is technology. It can be of benefit because of these two reasons.

It can automate tasks.
It can improve efficiency.

The technological innovation can consist of the following:

Point-of-sale systems
Inventory management software

3. Employment allowance:

The national minimum wage rise 2025 can be countered with employment allowance. Employment allowance can help with small business expenses. In addition to the minimum salary, the employment allowance has been increased. Small enterprises are therefore exempt from paying the first £10,500 in NIC. As a result, these companies will pay lower wages.However, the increase in the number of employees increases this NIC too. So, only small businesses can claim relief through this.

4. Increase in prices:

Price increment can help businesses deal with the impact. Businesses can increase the price in the following ways:

They should promote value-based pricing.
They should bundle services so customers can handle the price increase.

5. Financial consultancy:

The final strategy for SMEs is to speak to financial consultants. These consultants can help them understand the impact and plan accordingly.

Contact Sterling Cooper Consultants

At Sterling Cooper Consultants, we provide you with customised solutions for your businesses. We help you understand the wage increase and its impact on your profits. We assist you in figuring out a way around this. Check out our business advisory services to get your way around the national minimum wage rise 2025.