Uncategorized December 9, 2024

WHAT THE BUDGET MEANS FOR YOU: THE CHANGES TO EXPECT AND THEIR IMPACT ON UK HOSPITALITY

By Hussein Ahmad of Viewpoint Partners

The recent Autumn Budget 2024, announced by Chancellor Rachel Reeves, significantly impacts the UK hospitality sector, particularly in areas like National Insurance Contributions (NICs), business rates relief, and minimum wage increases. The following points summarise the main changes, and their effects.

NATIONAL INSURANCE CONTRIBUTIONS (NICs)

The employer NIC rate will increase from 13.8% to 15% by April 2025.
Additionally, the threshold for NIC payments will lower from £9,100 to £5,000, adding further strain on hospitality businesses that rely heavily on labor.
A higher employment allowance of £10,500 will offers relief to small businesses (with less than 40 staff and NIC bills of £100,000 or less), however, the combined effect of NICs and wage pressures is anticipated to push many employers toward automation and reducing staffing.

So what does this look like in reality? Let’s look at an example.

Example 1:
NICs for an employee earning £30k

Current NICs:

Earnings above threshold: £30,000 – £9,100 = £20,900
NICs: 13.8% of £20,900 = £2,884.20

New NICs:

Earnings above threshold: £30,000 – £5,000 = £25,000
NICs: 15% of £25,000 = £3,750

So, the employer’s NICs for an employee earning £30,000 will increase from £2,884.20 to £3,750, a rise of £865.80.

This illustrates how lowering the earnings threshold and increasing the NICs rate results in a notable rise in employer contributions. For employees earning more, the financial impact on employers is amplified.

Since service charge is exempt from NIC, this may serve as further encouragement for employers to reduce base wages and rely more heavily on service charge to top up pay.

MINIMUM WAGE INCREASES

The budget includes significant raises to the minimum wage, impacting an industry where low-wage positions are common. The higher payroll costs combined with the NIC increase mean that some hospitality businesses may struggle to sustain current staffing levels. This combination of rising costs may lead businesses to increase prices or find more efficient measures to maintain profitability.

The following table illustrates the National Living Wage rates which will come into effect from 1 April 2025.

Example 2:
Full-time employee on new minimum wage

Annual wage at new NMW for over 21s:

Hourly rate: £12.21 (vs. £11.44)
Weekly hours: 40.
New annual wage: 40 hours/week × 52 weeks/year × £12.21/hour = £25,396.80. (vs. £23,795.20)

Employer NICs:

Earnings above threshold: £25,396.80 – £5,000 = £20,396.80.
NICs: 15% of £20,396.80 = £3,059.52

Previous NICs on previous minimum wage:

Earnings above threshold: £23,795.20 – £9,100 = £14,695.20
NICs: 13.8% of £14,695.20 = £2,027.94

INCREASE FOR EMPLOYERS in 2025:

Employee wage: £25,396.80 – £23,795.20 = £1,601.60
NICs: £3,059.52 – £2,027.94 = £1,031.58
= A total of £2,633.18 p/a additional wage burden for minimum wage employees.

BUSINESS RATES

Business Rates are calculated based on a valuation of the useable square footage of a commercial property.

The business rates relief has been reduced from a 75% discount to 40% for the hospitality sector starting April 2025.

This change will lead to substantial cost increases, with the average rate for restaurants potentially rising from £5,051 to over £12,000. This is a sharp increase for an industry already operating on narrow margins. Reeves proposed “permanently lower” business rates for the sector, but these will not be enacted until 2026-27, leaving businesses with an immediate cost burden.

Example 3:
Business Rates Impact

Let’s say your average hospitality property has a rateable value of £200,000.

Current Relief:

75% relief on rates: £200,000 × 0.75 = £150,000.
Amount to pay: £200,000 – £150,000 = £50,000.

New Relief:

40% relief on rates: £200,000 × 0.40 = £80,000.
Amount to pay: £200,000 – £80,000 = £120,000.

So, you will see an increase from £50,000 to £120,000 in rates payable, an additional £70,000.

ALCOHOL DUTY

There’s a 1.75% reduction (1p average for each pint) in duty on draught beer, which is expected to benefit pubs and bars. However, other alcohol categories will see duty increases in February, which could negatively impact revenue for some businesses. The mandatory duty stamp on spirits will be removed as well to help spirit producers.

INDIRECT IMPACT ON HOSPITALITY SECTOR

INHERITANCE TAX ON FARMS

Farms will face a 20% IHT on combined agricultural and business assets exceeding £1 million, a departure from the previous full exemption. Estimates suggest that up to 75% of commercial family farms could be impacted, potentially leading to land sales to cover tax liabilities, potentially leading to farm consolidation and a decline in the number of small, family-owned farms. This may result in reduced diversity and higher costs for the type of small-scale produce which many restaurants rely on.

FUEL DUTY

The government has announced a two-year freeze on fuel duty, ensuring transport and delivery fees remain stable. This stability is crucial for hospitality businesses that rely on regular deliveries, helping them manage operational costs more effectively

STATE PENSION INCREASE

The increase in state pensions will enhance the spending power of older consumers, alleviating financial pressures on families supporting them. This rise in disposable income could lead to more frequent outings and spending within the hospitality sector, boosting revenue.

INFRASTRUCTURE INVESTMENT

The government’s commitment to investing in infrastructure, housing, and green energy promises to bolster the economy. Improved infrastructure will enhance access to hospitality venues, stimulate local tourism, and drive economic growth. Additionally, investments in green energy could help hospitality businesses reduce long-term energy costs, promoting sustainability.

Adapting to New Budget Changes: Strategies for Hospitality Businesses

Adapting to the new budget changes will require some strategic adjustments from the hospitality businesses. Here are a few key strategies that might be worth considering. Many of these may seem obvious, or may be things that we are already implementing in this challenging climate, but we hope that they may serve as a starting-point for an exploration of what aspects we could lean into still further.

Cost Management and Improving Productivity

To address the increased National Insurance Contributions (NICs) and National Minimum Wage (NMW), businesses might streamline operations, such as optimizing staff schedules or increasing the use of technology to improve efficiency. They may also explore ways to cut down on non-essential expenses.

A deep knowledge of the costs will be essential to deal with the increasing operational expenses related to the new budget. Furthermore, it will be essential to focus on staff training and on adjusting staffing levels depending on busy and lower periods.

Pricing Adjustments

Many establishments will need to adjust their prices to cover the additional costs. While this can be a delicate balance, clear communication with customers about the reasons behind any price changes can help maintain goodwill.

Enhanced Customer Experience

Focusing on enhanced customer experience can encourage more spending. This could be focusing on staff training so that your FOH create a really special atmosphere with great knowledge of the offering, or even working out how to tweak the dining environment to make it more engaging.

Retaining Staff

Great workplace culture and care for your team is more essential now than ever. Holding onto long-term employees will become essential to enact the key strategies listed above:

Cost Management and Improving Productivity: Retaining experienced staff will help to reduce the costs related to recruitment, hiring and training new employees. Furthermore, long-term employees are more familiar with the business’ operations, leading to greater efficiency and productivity.
Pricing Adjustments and Enhanced Customer Experience: Experienced staff are often better at providing consistent, high-quality service, which can improve customer satisfaction and loyalty. Additionally, being familiar with the customers put them in a better position to explain the reasons behind the price adjustments.

Overall, these budget changes could lead to reduced hiring and wage growth in hospitality, with many firms considering downsizing or shifting toward self-service technologies to reduce operational costs. For example, more venues might adopt self-ordering kiosks to offset wage expenses. These adjustments highlight the broader challenge facing hospitality: balancing labor costs with a sustainable, profitable business model in the current economic environment.

Do get in touch with Hussein and the team at Viewpoint Partners if you would like to discuss how they could advise and help your business.