NIC & MINIMUM WAGE INCREASES COME INTO FORCE. WHAT NEXT?

The UK Government’s Autumn Budget in October 2024 set out substantial increases both in Employer’s National Insurance Contributions (‘NIC’) and various Minimum Wage (‘MW’) rates coming into force in early April 2024 (April 1 for MW and April 6 for NIC).  In summary these changes are:

• NIC: Secondary class 1 NIC employer contributions will increase from 13.8% to 15% of an employee’s earnings above the specified threshold.  The threshold itself will decrease from £9,100 to £5,000 making a greater proportion of an employee’s earnings subject to the increased NIC.
• MW:

National Living Wage:

• For 21 year olds upwards, an increase from £11.44 to £12.21 (6.7%).

National Minimum Wage:

• For 18 – 20 year olds, an increase from £8.60 to £10.00 (16.3%).
• For 16 and 17 year olds and apprentices, an increase from £6.40 to £7.55 (17.9%).

Though lauded by the Government as a budget that did not increase the burden on “working people”, the passing of the burden to businesses is clear.  This is not without issue given the inflationary and business and consumer confidence issues seen since the Budget. The NIC and MW changes above show a clear increase in labour costs that will filter through to all aspects of the economy including the construction sector.  Of some (albeit little) solace is that the Chancellor has not imposed further increases or taxes on businesses in the recent Spring Statement on 26 March 2025.

Contractual recourse for compensation?

It is advisable for supply side parties (consultants, contractor and subcontractors alike) to check what (if any) contractual right there may be under existing contracts for additional monies because of these NIC and MW changes.  While the industry standard form contracts, such as the JCT and the NEC, in their unamended form may allow for a right to claim additional monies for increased NIC and MW costs, in most instances this requires the relevant provisions (which are optional), such as Fluctuation Options under the JCT and Option X2 under the NEC to be specified to apply.  It should also be noted that some pricing models in standard form contracts, such as the NEC Option E (Reimbursable) may allow reimbursement of the labour costs including NIC and MW increases as part of the allowed Defined Cost.

The industry standard forms are usually widely amended, particularly in respect of allowances for additional time and cost, so unless under a reimbursable pricing structure it is unlikely that current contracts may provide a right of recourse for these increased NIC and MW costs.

For new contracts about to commence, or in progress, negotiation supply side parties should consider:

• increases to the Contract Sum or Fees to offset these NIC & MW increases (although this may be commercially unacceptable to Employers).
• incorporating contractual protections to allow a right to claim for any similar tax, NIC or MW changes in the future during the life of the project.

To understand in greater detail the possible contractual rights for additional money to cover increased NIC and MW costs, read an article published by my colleagues, Will Buckby and Ben Couldrey. from November 2024. Compensating for the increase in employer National Insurance contributions – the clock is ticking from the Autumn Budget! | Beale & Co

Economic and practical effects of the changes

Although the NIC and MW increases are only now coming into force, much has been written and speculated in industry press since the Autumn Budget about their ramifications. The most obvious comment is that these increases are likely to have an inflationary effect on labour costs in the construction industry, and in turn, the overall costs of projects.

Although the MW increases of themselves may have limited effect on the construction industry given the higher than average wages in the construction sector (at an average of £40,000), the increase at the junior level will likely see employees further up the chain demand similar increases to maintain the premium of their positions, causing a greater increase on labour costs than the percentage MW changes might suggest.

Also, the effect of the MW increases further down the supply chain may have greater impact on smaller players, such as builders’ merchants, who will have more exposure to these rises with a part-time and low wage workforce. They may pass on these costs in the form of increased materials costs.

Consultancy Arcadis’ UK Winter Market view of the construction sector published in December 2024, suggests that:

• the additional costs for construction projects relating to directly employed labour will add 0.75% to 1% to the construction costs of existing projects.
• increased NICs may see a return to engaging more self-employed labour to avoid the NIC increases. Although levels of self-employment have been dropping since 2019, the change in tax treatment may see a reversal of this trend.

The inflationary effects of the NIC and MW changes are clear, but this may not be an end to the story.  Despite the Chancellor saying the Autumn Budget is a “once in a parliament reset”, and not raising taxes in the Spring statement, come Autumn Budget 2025 things may well be different.  Increasing global and economic tensions, including tariffs and trade wars, will continue to see pressure on public finances and the Chancellor may have to consider further raids on businesses and individuals.

Conclusion

While wider economic and geo-political events appear in a constant state of flux, one certain thing is that labour costs will rise come April 2025 because of the NIC and MW increases and may again in subsequent budgets as the Government tries to grapple with the public finances.

Supply side parties should:

• check existing contracts to determine if there are any grounds for claiming additional monies to offset these increases.
• consider carefully new contracts, including those currently being negotiated, to see if changes to pricing needs to be made to offset these increases, and if contractual protection should be included to address any similar changes in the future.

Should you have any questions on the content of this article or the application of some of these principles to your construction contracts or professional appointments then please contact the author.