Commercial Real Estate
Retail and Hospitality

Danny Schwarz, Sophie Levitt
January 2025

Head of Commercial Real Estate Danny Schwarz and Solicitor Sophie Levitt discuss how the increased rate of employer Class 1 national insurance contribution rates will impact property investors and landlords.

Danny and Sophie’s article was published in FT Adviser, 13 January 2025.

NIC Rate Hike: UK businesses brace for landlord and tenant turmoil

Rachel Reeves presented her Autumn Budget 2024 to Parliament on 30 October, to a mixed reception. One of the most controversial changes announced was that the government will be increasing the rate of employer Class 1 National Insurance Contribution (NIC) rates from 13.8% to 15%. The current rate of 13.8% is payable on the amount that an employee’s earnings exceed the secondary threshold of £9,000 per year/£175 per week. However, the increased rate will be 15% and the secondary threshold will be reduced to £96 pounds per week/£5,000 per year. These changes to employers NIC rates will come into effect on 5 April 2025, however are already posing concerns for the UK’s retail and hospitality sector.

While the increase in employer NICs aims to raise revenue for vital services, such as the NHS, and may increase funding for contributory benefits, such as the State Pension, the measure could have a profound effect on retail and hospitality businesses due to the increasing costs such businesses face and may result in shop closures, and others feeling the strain.

As a result of these changes, it is vital that property investors and landlords consider how these measures will impact their buying strategies, and tenants may well consider renegotiating their lease agreements to offset the higher operational costs which may otherwise impact their businesses.

For landlords and tenants alike, these reforms pose a number of challenges.

Operational costs

The prospect of raising employer National Insurance costs could prove to be a major setback for businesses. As a result of these reforms, businesses could be forced to face higher operational costs due to increased NICs, which would reduce their profit margins and place a greater strain on their livelihoods. For instance, it has been estimated that Tesco alone could face a £1 billion pound increase in its National Insurance bill over the course of this parliament.

Smaller and medium-sized enterprises (SMEs) are expected to be the most severely impacted as a result of these changes. SMEs often operate on tighter profit margins and many such businesses will therefore be forced to decide whether to fund the higher NICs by operating on reduced profits, cutting back on expenses or increasing their prices.

As a result, a phased introduction of the NIC threshold may be a better way for businesses to absorb the costs without passing them on to consumers in the form of higher prices.

Price increases

If a retail business opted to increase their prices of goods and services to offset the higher costs, consumer spending and demand could also be impacted as a result of the NIC hikes. Higher prices could exacerbate the cost-of-living crisis, making everyday items more expensive for shoppers.

It therefore comes as no surprise that more than 70 of Britain’s largest retailers have signed an open letter to warn the Chancellor that the NIC hike may lead to price increases and job losses throughout the high street. Some of the signatories included Aldi, Lidl, Boots, Ocado, Morrisons, Greggs and JD Sports – all of whom share concerns about the viability of such proposals.

Lease agreements

Business tenants who face the higher operational costs from the increased NIC rates may also seek to renegotiate their lease terms as a result of these changes. This could potentially lead to more flexible or reduced rent agreements since landlords are likely to be reluctant to lose longstanding tenants and will want to avoid being left with vacant properties and no rental income.

There are several ways for landlords to offer incentives and concessions to tenants to help them through this new financial burden. Temporary rent reductions could help tenants manage their cash flow during challenging times. Landlords could otherwise offer reduced rent for early renewal, waive certain fees or provide additional services such as maintenance.

Consequently, the terms of the lease could be made more manageable for tenants.

Rent arrears

Moreover, under the strain of these measures, certain landlords may also be less willing to renegotiate their lease terms and tenants may struggle to absorb the additional costs. Tenants, particularly in the retail and hospitality sectors, may be unable to generate enough income to meet their rent obligations. This could lead to higher rates of tenant defaults, leaving landlords with no choice but to forfeit their leases and to re-market the property. If landlords were left with no rental income, this would place a further strain on their finances.

There would also be additional expenses including administrative costs and legal fees when dealing with tenant defaults.

The fact that the British Retail Consortium is seeking a meeting with the Chancellor to discuss their concerns about the increased NIC rates, is proof that the scale of the new costs has the potential to cause severe financial hardship across different businesses.

Property transactions

The hike in NIC rates could affect the overall cost structure of property transactions and lead to higher property prices for buyers and sellers. Buyers may face higher purchase prices, which can affect affordability and demand in the property market. This could create a more challenging environment for property transactions, with reduced demand leading to slower market activity. 

If property investors and developers must operate on reduced profit margins, therefore, certain projects may seem less attractive or viable. This could lead to a decrease in the number of new development projects.

Higher NIC rates would also likely lead to increased labour costs for property investors and developers. This would inevitably make construction and development projects more expensive, potentially leading to higher prices for new properties.

Additionally, higher costs may be reflected by the fees of the professionals who are involved in the development projects, such as surveyors, architects and contractors.

Reduced investment

With increased costs due to higher NIC rates, landlords and tenants may also reduce investments in property improvements, expansions, or new technology, potentially slowing growth and innovation in the sector. The NIC rate hike has the potential to exacerbate economic uncertainty and make buyers, sellers and investors more cautious.

It is highly likely, therefore, that the changes will affect the overall health of the property market and have a significant knock on effect on the UK’s retail and hospitality sector.

Potential for legal disputes

Unsurprisingly, therefore, changes implemented as a result of the Budget could lead to legal disputes over lease agreements, employment terms and other obligations as parties adjust to the new financial landscape. There is also potential for businesses to struggle to comply with these new NIC regulations, which could lead to disputes with HMRC over unpaid contributions or penalties for non-compliance.

It is vital that businesses stay updated with the latest NIC regulations to ensure that they remain complaint. Payroll systems will need to be reviewed and updated to reflect the changes in the NIC rates. Compliance will reduce the risk of disputes arising from regulatory issues and will ensure a smoother operation of business.

Navigating the increased secondary NIC liability

As a result of Reeves’ proposals, the UK government estimates that 940,000 employers will face an increased secondary NIC liability. It is therefore inevitable that businesses across the UK and especially SMEs are feeling the pressure of this financial burden. It is essential for businesses to consider a variety of cost saving measures and to save price increases and redundancies as a last resort.

Landlords must also take a balanced approach and agree to renegotiate their lease agreements with loyal tenants if it is reasonable to do so. Landlords may be able to offer more flexible payment plans or allow temporary reductions with the agreement to recoup the difference at a future date.

However, maintaining open and transparent communication is fundamental.

Landlords and tenants should discuss the financial challengers together to find mutually beneficial solutions. By adopting this strategy, landlords can help their tenants through financial hardship whilst maintaining occupancy and fostering positive landlord-tenant relationships.

Looking ahead

Unsurprisingly, the proposed NIC hikes has provided cause for concern for many UK businesses in the retail and hospitality industry. From the impact on operational costs to the risk of litigation, there are a plethora of factors that must be considered if businesses are to weather the storm and remain both profitable and compliant.

In order to navigate these choppy waters, it is therefore vital that businesses seek tailored legal advice concerning their employment obligations and property agreements to ensure that they are braced for the upcoming changes and able to tackle the issues head on.

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