The Chancellor’s decision to increase ER NI contributions means that many charities, like other employers, will face higher payroll costs. The changes announced in the Autumn Budget also affected the per-employee threshold at which ER NI applies. This will be lowered from £9,100 to £5,000, which will further increase staff costs. However, this is countered by an increase of the Employment Allowance from £5,000 to £10,500, and the £100,000 threshold at which this relief fell away has also been abolished, meaning even large employers will now be able to claim the allowance.

For small charities, the increase in ER NI contributions may be offset by the lifting of the allowance threshold. However, larger charities will face significant increases in their staff cost because of these changes, in addition to increased living wages.

As many larger charities are already operating on tight budgets, with limited capacity to absorb additional costs, the implications of increased ER NI contributions are significant:

• Higher operating costs: For charities with significant payroll expenses, increased ER NI contributions lead to substantial additional costs. NCVO estimates that this increases annual costs by £1.4bn for the charity sector.
• Reduced service delivery: Charities may need to reallocate funds to meet increased staff costs, potentially reducing the scope or quality of services they currently provide.
• Staffing challenges: Higher employment costs might necessitate recruitment freezes, reduced staff hours, deciding against inflationary salary uplifts or implementing redundancies. This will add pressure to a sector that already struggles with staff recruitment and retention.
• Threat to financial stability: For some charities, these changes could exacerbate existing financial pressures, increasing the risk of insolvency.

The charity sector has not taken this development lightly. Recognising the potential damage to the sector and those who rely on its services, NCVO and ACEVO issued a joint letter to the Chancellor, highlighting the difficulty of meeting increased costs without additional support. Their open letter, co-signed by over 7,300 charities, requested the Chancellor’s commitment to reimbursing voluntary organisations’ increased ER NI contributions.

This issue was also debated in Parliament, where several MPs acknowledged the sector’s concerns. Despite these discussions, the government has maintained its position, citing the need for increased revenue to support public spending while acknowledging the vital contribution of civil society. This leaves charities with little choice but to prepare for the cost increases.

Most charities are already taking proactive steps to mitigate the impact of increased staff costs. Key actions include:

1. Review financial forecasts: Calculate the financial impact of increased ER NICs on your charity’s budget based on current staffing plans and update cash flow projections to help identify potential funding gaps or temporary cash shortfalls.
2. Review your charity’s staff structure: Evaluate current staffing structures to determine if efficiencies can be achieved without compromising service delivery, and review if some under-funded services are not mission-critical so that resources could be re-directed. If appropriate, consider increasing the use of volunteers where feasible.
3. Engage stakeholders: Communicate with trustees, funders and key stakeholders about the potential impact. Seek additional support from funders and explore new revenue streams to offset increased costs.
4. Plan for contingencies: Develop a contingency plan to address potential financial shortfalls, including prioritising critical activities. Monitor financial health closely and regularly to ensure early identification of risks.

Over recent months, there have been many closures and restructures in the sector. If you prepare the financial board reports or you are the ‘finance trustee’ on a board, your role is to help the other trustees understand the charity’s financial situation – its financial performance, cash holdings and reserves position – so that decisions can be made jointly by all trustees, and the pressures of financial challenges are shared.

The Charity Commission’s revised CC12 guidance, Improving your charity’s finances, offers advice to trustees on how they can improve their charity’s finances, protect against financial difficulties and understand what to do if their charity is insolvent. This includes a checklist to help trustees assess if their charity is at risk of insolvency.

Judith Miller, Partner at Sayer Vincent, presented a session on ‘Navigating financial challenges as a board’ at our virtual Small Charities seminar in October. This 35-minute session was jam-packed with practical tips for trustees and treasurers and is still available on demand (free of charge for all, so you can share it with your trustee colleagues).