Navigating Insolvency Risks

Navigating Insolvency Risks Following the Upcoming National Insurance Contribution Increase

The thought of insolvency can be daunting for anyone who runs their own business, be that a limited company, partnership or a sole trader. Yet, in times of economic uncertainty and rising tax and costs, it’s essential, more than ever, to be proactive in addressing potential financial challenges. 

The upcoming increase in National Insurance (“NI”) contributions will come into force on the 6 April 2025 and all businesses with employees face a significant financial pressure that could lead to insolvency if not managed properly. In this blog, we will discuss the likely insolvency related issues arising from this change and try to offer practical and commercial solutions to mitigate the risks and navigate this financial shift effectively.

What’s Happening with National Insurance Contributions?

In an effort to boost funding for the National Health Service (NHS) and social care, the UK government has announced a rise in National Insurance contributions starting from 6 April 2025.  These include:

• Reducing the threshold as to when NI becomes payable from £9,100 per year to £5,000.
• Increasing the National Insurance contributions rate from 13.8% to 15%.

The Government has however increased the Employment Allowance from £5,000 to £10,500 for smaller business, which may help to mitigate some of the above increases.

This increase will see both employers and employees paying more in NI, with the rise expected to add significant operational costs for businesses, especially small and medium-sized enterprises (“SMEs”). The rise in costs is likely to contribute to cash flow issues, and in some cases, trigger insolvency if businesses are unable to adapt to the new financial pressures.

Further implications are likely to include:

1. Reduced profitability.
2. If profits are reduced business owners are likely to see a reduction in the sums that they are able to draw out of the business, therefore putting their personal finances under strain.
3. Businesses are likely to have less savings or surplus funds with which to invest in their business to allow it to continue to grow.
4. If businesses still wish to invest, and do not have the necessary reserves to do so, they will be forced to borrow funds, which will further impact their profitability and cashflow, as interest will be payable. 

Identifying the Early Signs of Insolvency Due to the NI Increase

It will therefore be important for business owners to monitor their financial situation closely during this period. Some early warning signs of financial distress that could lead to insolvency include:

• Declining Cash Flow: If you notice a decrease in your available working capital or difficulty in paying bills on time, it’s time to seek professional advice from a licensed insolvency practitioner.
• Increased Debt: If the level of your creditors is rising or you are having to pay invoices late, this can be a sign of approaching insolvency.
• Overdraft Limits: If the business is constantly in its overdraft and frequently at the limit of that overdraft facility, this is a sign that the business is living “hand to mouth” which leaves it vulnerable to any delays in receiving funds from customers or clients.

How Insolvency Practitioners Can Help

If you find that your business is experiencing any of the above issues, due to the increase in National Insurance contributions, it is important to seek professional assistance sooner rather than later. Insolvency Practitioners (“IPs”) can help you navigate the complexities of insolvency law and explore viable options to resolve your financial difficulties.

Some of the common solutions include:

Time to Pay Agreements

If your business is facing temporary cash flow issues, it is sometimes possible to agree payment plans with your creditors, including H M Revenue & Customs (“HMRC”).  HMRC will typically allow businesses to pay their outstanding liabilities over a six to eighteen month period.  They will insist however that all future returns and liabilities are paid on time.  When agreeing the level of monthly payments to be made with HMRC therefore, it is important not to over commit and leave the business with insufficient funds to pay its future liabilities on time.

Company Voluntary Arrangement (“CVA”)

A CVA is a legal agreement between the Company and its creditors that allows it to pay off its debts over a period of time, which is typically three to five years.
A Company Voluntary Arrangement is a good option for businesses that are viable, but are unable to “catch up” with their liabilities, and need a breathing space to restructure the business.

Administration

If your business is no longer viable as a whole, but one part or parts of it are, it is possible to rescue the viable part by using an Administration.

Only an Insolvency Practitioner (“IP”) can act as an Administrator and can facilitate a pre-pack.  It is important therefore to discuss this option with a suitably experienced IP.

Liquidation

In cases where the business is no longer financially viable and cannot be saved, liquidation may be the necessary step to take and a Creditors Voluntary Liquidation is the most common form of liquidation. 

With proper planning, and by following the relevant rules and regulations it is sometimes possible to have a phoenix company. 

How to Mitigate the Impact of the National Insurance Increase

Even if you are not yet facing insolvency, it is important to try to mitigate the impact of these increases to safeguard your business from the financial pressures.  To do this you should consider the following:

• Review Your Pricing Structure: Is it possible to increase your prices to cover the increased costs that your business is likely to incur?
• Negotiate With Suppliers: Is it possible to renegotiate contracts with suppliers to either lower the cost or agree longer credit terms?
• Diversify Your Revenue Streams: Consider exploring new revenue streams to reduce reliance on existing sources.
• Cut Unnecessary Costs: Reassess your operational expenses and identify areas where you can cut back without compromising quality.

Act Early to Safeguard Your Business and Take Professional Advice

The upcoming increase in National Insurance contributions presents a significant issue for all businesses. However, with early action, the right strategies, and professional guidance many businesses will be able to overcome the situation and continue to trade and grow. Also it is important to remember that insolvency isn’t always the end for a business. In fact insolvency can be used to restructure businesses to make them stronger and more profitable in the medium to long term.

If your business is facing difficulties you should seek professional advice from a licensed Insolvency Practitioner.  If you would like a free confidential meeting to discuss your situation, please do not hesitate to call us on 01326 340579 or email help@purnells.co.uk.