For most small business owners, managing daily operations goes beyond their core work, with admin tasks like payroll, onboarding, and compliance taking up a large chunk of time.
This is especially true for the UK’s smallest businesses, which are usually those with up to nine employees. According to Xero’s research, these businesses spend more than half (54%) of their working week on tasks outside their more immediate responsibilities.
New regulations and taxes are also set to impact how small businesses pay their staff, amongst other things. With so much already on their plate, the added challenge of staying across changing legislation is daunting. However, with digital tools that help small businesses manage their finances and their payroll, these new requirements don’t have to be a burden.
What shifts are on the horizon, and what do they mean for small businesses?
There were a number of changes announced in the last Autumn Budget. For example, starting in April 2025, Employer National Insurance Contributions (NICs) will increase by 1.2% to 15% while the level at which employers start to pay National Insurance is dropping to the first £5000 of staff’s wages. Additionally minimum wage rises are planned to support the cost of living. To support small businesses to continue to employ, there will be an increase in employment allowance from £5000 to £10,500 from April 2025. This means a small employer will be able to take off £10,500 of their National Insurance bill for the year, providing relief against the increased NICs costs.
Another recent change is the new flexible working law that took effect in April 2024. Now, employees can request permanent adjustments to their working terms — including hours, timing, or location — without waiting six months to make a formal request. This shift signals the end of 9-5 workdays and opens the door to flexible working, including remote work, compressed hours, or job sharing. There is also of course the newly proposed Employment Rights Bill too, which could shift things again in a few years time – although for now, nothing is set in stone and it is up for consultation.
While flexible arrangements may present initial challenges for small business owners, it’s also an opportunity to keep good people around, and make sure they’re happy in their work environment.
Good digital payroll software tools can make it easy for owners to adapt to flexible working. For example, Xero has a working patterns feature which makes it easy to set up bespoke working patterns depending on the business’ needs, apply that pattern to employees and it’s then automatically applied to their pay cycle.
How can small businesses adapt to these changes?
Effective payroll management is more than basic wage calculations and requires in-depth knowledge of the UK tax system and employment laws — a tough ask for the 99.9% of UK businesses that are SMEs. For instance, one crucial aspect is correctly classifying workers – whether they’re full-time employees, workers, freelancers, or contractors – as this determines their tax treatment and payment structure. Getting these classifications wrong can result in serious consequences, both legally and financially, and can be huge risks for small businesses.
Small businesses can take steps to ensure they’re ready:
- Update employee work arrangements: As flexible working becomes more common, keeping accurate, up-to-date information on employees’ agreed working pattern and arrangements is essential
- Adopt a digital tracking system: Moving away from pen-and-paper or spreadsheet methods will reduce errors and keep payroll data accurate, especially as working arrangements become more varied
- Reassess hiring practices: Flexible work laws allow micro-businesses to strategically hire based on demand, enabling them to better align staffing levels with business needs throughout the year.
Making change less daunting with digital tools
With more changes to navigate, digitisation is essential to remaining compliant and making payroll simple.
Businesses seeking operational efficiency are increasingly turning to integrated payroll and accounting solutions. By consolidating these functions onto a single platform, small businesses can leverage automation to streamline processes, reduce manual errors, and gain real-time visibility into their financial health.
Using these connected systems, which often come with compliance tools, means that businesses can more easily navigate complex regulatory requirements and automated RTI submissions to HMRC. This integrated approach not only enhances efficiency, but also empowers businesses to make informed, data-driven decisions.
Embracing connected digital solutions goes beyond efficiency, however – it strengthens small businesses with the technology to scale, ensure compliance, and enhance the employee experience, all while allowing them to focus on what truly matters: growing their business.
Kate leads Xero's business operations in the UK, playing an active role as an advocate for our customer community. She joined Xero in 2019 and has held critical leadership roles in Xero’s strategy and operations teams, globally and in the UK. Prior to Xero, Kate held strategy roles at Deloitte Australia and KPMG. She holds a Bachelor of Science (Biology) from the University of South Hampton and trained and qualified with the Institute of Chartered Accountants of Scotland (ICAS).
