Businesses’ profit growth expectations remain low and many are looking to review employee costs – including implementing hiring freezes.
The latest Business Outlook Tracker from business and financial adviser Grant Thornton UK LLP, which surveyed 800 UK businesses in December 2024, finds that the increasing employment costs announced in the Autumn Budget are one of the biggest challenges for businesses heading into 2025, along with attracting and retaining top talent.
Over half (52%) of the businesses surveyed anticipate that they will have to reduce hiring or cut jobs and offer reduced or no pay increases and bonuses to their employees, due to the increasing cost burden. Two thirds (66%) also plan to review their employee benefits offering, with 16% expecting to reduce their investment in employee reward and benefits over the next six months.
Over half (54%) of respondents also think it likely that their business will need to pass on the impact of these higher employment costs to customers by increasing prices.
The research shows that medium-sized businesses are more affected by these changes than larger businesses. More medium-sized businesses plan to cut jobs (55%), freeze or reduce hiring (55%) and pass on cost increases to customers (56%), compared to their larger counterparts (42%, 43% and 47% respectively).
Medium-sized businesses’ confidence in their funding position has been on a steady decline over the last year and remained stagnant in December, at –9 percentage points (pp) lower than the start of this year. While the changes announced in the Budget are already resulting in them looking at ways to cut costs, almost two thirds (65%) of medium-sized business respondents anticipate that their business will need to apply for additional funding next year. Of these, almost one in four (23%) say it will be needed to cover increasing employment costs.
Despite these planned changes to try and manage costs, medium-sized businesses’ confidence in their profit growth remains subdued and has dropped significantly compared to February (-21pp). Almost half of the medium-sized business respondents (43%) now expect their profit levels to decline over the next six months. This contrasts to the profit growth expectation of large corporates – where only 26% of respondents expect profits to decline. This corresponds to their overall confidence around the outlook of the UK economy with 92% of large corporates being optimistic compared to 72% of medium-sized businesses.
Alistair Wardell, Partner at Grant Thornton UK LLP and Head of Restructuring in the South of England and Wales, said:
“With many Welsh businesses considering reviewing their employee benefits packages, transparency and clear communication around any changes will be essential. Employees should understand how they will be impacted by any changes and what new or revised benefits are available. If this isn't understood, then it could impact the take-up rate of these benefits among employees and so consequently affect the National Insurance savings that employers could potentially unlock.
“While employers should ensure that they're doing everything they can to keep costs down, offering a competitive reward and benefits package is still essential for attracting and retaining the best talent. A comprehensive review of benefit costs to ensure best value is achieved will help ensure they’re maximising the return on any spend and help businesses to both manage increases and continue to recruit high-quality employees.
“Employee expenses can be a considerable cost to a business. The changes announced in the Autumn Budget have prompted many employers to consider how they can deal with increased employment costs, but it’s important for businesses to remember that there's often scope to make savings that will help to offset some of them. Taking advantage of employment tax exemptions may help them to maximise any spend, along with understanding any tax-free benefit options. The ability to offer benefits such as work-related training or purchasing holiday can also enhance a business’ employee value proposition, often with little or no additional cost.”
Schellion Horn, Head of Economic Consulting, Grant Thornton UK LLP, said:
“Our previous Business Outlook Tracker was undertaken just before the Autumn Budget, at a time when the Chancellor was looking to manage expectations around the fiscal challenge ahead so as not to cause too much market instability on Budget day. It might have been expected that business confidence in the economy, investment potential and profitability would rebound after this – however that’s proven not to be the case.
“Our research indicates that the changes to employer’s National Insurance contributions and the National Minimum Wage announced in the Budget have hit businesses hard across the board – but particularly small to medium sized businesses. After the last few years of having to manage costs due to high inflation, wage growth and rising interest rates, just when there is light at the end of the tunnel, the market is now faced with further cost increases and the likelihood of interest rates staying higher for longer.
“Many of the businesses surveyed are looking to pass on at least some of these cost increases to customers. This will put pressure on inflation and keep interest rates higher for longer, which in turn will place more pressure on business costs. However, in practice, many of these firms – particularly those in the mid-market with less market power – will be unable to pass through all cost increases and will need to resort to other measures to manage these cost pressures.
“Even with these planned changes, medium-sized businesses clearly anticipate that they will not be enough to stabilise their profitability, with almost half expecting their profits to decrease moving forward. The Bank of England has now also downgraded its 2025 growth forecasts and warned that interest rates will fall more slowly than anticipated. With this in mind, the focus for businesses of all sizes, but particularly smaller to medium-sized, will continue to be managing costs and streamlining efficiencies where possible. For those looking to access new funding, staying on top of the available grants and investments, such as from local councils, and taking advantage of them where possible could make a real difference to those looking to offset the impact of ongoing cost pressures.”
