Employers in the real estate sector are among many businesses bracing for the impact of the increase to employers’ national insurance contributions, which will come into effect on 1 April.
Many businesses and institutions have spoken out against the increase and the lowering of the threshold at which employers pay, including Simon Wolfson, CEO of retailer Next, which will see its wage bill rise by £70M as a result. More widely, critics of the policy say the measure could lead to redundancies and job losses.
The real estate sector will be affected, as will many other industries, said Phil Westerman, partner and head of real estate at accountancy practice Buzzacott.
“No doubt, our clients are worried about these upcoming changes, as the impact will be far-reaching,” Westerman said. “All elements of the supply chain will be looking to offset the higher cost of labour, which will create an even more challenging environment.”
However, Westerman added, it is possible to mitigate the impact with good planning, although many fixes are longer-term, and a near-term cash flow squeeze is a strong possibility.
Bisnow asked Westerman and Buzzacott Business Tax Partner Liam McKeevor about the steps a business can take to offset the impact of the changes to employers’ NI contributions.
Bisnow: How do you expect the increase in employers’ NI to impact the real estate sector?
Liam McKeevor: The more significant change in the budget for many employers was not moving the rate from 13.8% to 15% but the decision to nearly halve the threshold at which employers’ NI is due to £5K from £9,100. This adds £615 to the cost of each member of staff. As a result, the change disproportionately impacts labour-intensive employers with typically a lower-paid workforce.
In the real estate sector, this will have a wide and far-reaching impact. It will affect businesses directly in terms of labour costs, particularly for those working in, for example, property management where there are a high number of lower-paid employees. Indirectly, it will inevitably impact the sector through higher underlying construction costs.
Bisnow: Will real estate businesses be able to pass on additional costs to clients to avoid eroding margins?
Phil Westerman: Very few businesses in the real estate and construction sector will find it easy to pass on the increase in costs. Businesses in competitive areas such as property management, estate agency, construction and maintenance will struggle to increase their fees and prices.
Margins in these industries vary widely. For construction and maintenance firms that operate with typically thin margins, limited bank facilities and small cash reserves, the impact could be severe. There’s even a risk of insolvency for some smaller businesses or those with weak balance sheets.
Higher-margin developers and housebuilders may also struggle with potential increases in construction costs, coupled with the fact that residential and commercial property values remain subdued. This will impact the number of properties that are built, with projects more likely to be put on hold until the property market recovers and house prices increase.
Bisnow: How can clients prepare to mitigate this tax increase?
Westerman: Businesses need to budget for the impact. The upcoming change to employers’ NI was only confirmed to businesses on 30 October 2024, leaving them limited time to prepare. They should review their pricing models, ensure they have robust tendering processes in place, and consider their internal structure to ensure that their teams are structured efficiently.
They need to make sure that all eligible tax reliefs, allowances and capital expenditure deductions are being utilised. By seeking professional advice, they can make sure that all impacts are being considered and addressed.
Bisnow: Could a business make changes to the structure of its workforce to reduce the tax increase?
McKeevor: Restructuring the workforce can help. It will be important to review how the teams in your business are structured and work together with a view to getting the most out of the employees you have and ensuring teams are as productive as possible.
Some employers may seek to make better use of more contractors than employees, as contractors are generally not subject to employers’ NI contributions. However, consultants can be more expensive than employees, which is likely to negate any saving.
In addition, businesses must consider the implications of IR35 regulations, which may apply depending on a contractor’s working arrangements. The government recognised that the employers’ NI increase will drive tax avoidance, so the autumn budget also announced additional HMRC funding for IR35 investigations.
Bisnow: Can better use of technology to streamline a workforce help to reduce labour costs?
Westerman: Potentially. Investing in property management software, automation tools for administrative tasks, and digital marketing platforms can reduce the need for manual labour and improve efficiency. Savings could be used to invest in continued and wider automation of plant and machinery to further reduce labour costs.
This investment will also help businesses redirect resources toward higher-value activities such as new customer acquisition. There are also likely to be tax benefits available through full expensing of capital expenditure, or research and development relief may be possible where a business is developing technology solutions.
Bisnow: How could measures such as capital investment help to balance out cost rises?
McKeevor: Capital investments in energy-efficient properties, modern systems or automation can result in long-term savings through reduced operational costs and increased asset value. Tax reliefs such as the annual investment allowance and full expensing, if available, can help alleviate some of the upfront costs of capital spend.
Investment, by its nature, is a longer-term solution, and businesses need to have the resources available to fund this investment. While it will undoubtedly be needed, there is an immediate cost increase and pain coming from April as a result of the budget. To fund investment, as well as the cash flow impact of additional NI liabilities, a business may need to review its funding arrangements and consider alternative sources of finance.
This article was produced in collaboration between Buzzacott and Studio B. Bisnow news staff was not involved in the production of this content.
Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.
