Rumoured increases to employer pension contributions in next month’s Budget are sparking panic among UK businesses, with nearly one in five firms warning they could face insolvency if contribution rates rise.
A survey of 500 businesses by consultancy Barnett Waddingham found that 19% of employers believe a mandatory hike in workplace pension contributions could push them over the edge financially. More than 30% say they would respond by freezing recruitment or cutting headcount, further tightening an already strained labour market.
The warning comes as companies continue to absorb cost increases introduced in Chancellor Rachel Reeves’ previous Budget, including: The National Living Wage rising to £12.21 from April 2025 and Employer National Insurance Contributions increasing from 13.8% to 15%.
Martin Willis, partner at Barnett Waddingham, cautioned that even a modest rise in pension costs could have severe consequences.
“Even a small increase could disrupt businesses, stall hiring and in some cases threaten livelihoods,” he said. “These findings highlight the financial tightrope many firms are still walking, exacerbated by the national insurance hike and long-term wage inflation.”
Only 17% of firms surveyed said they could absorb the rise with minimal disruption.
While businesses fear additional financial pressure, employees are also feeling the strain, with growing concern that the current 8% auto-enrolment minimum contribution is insufficient for a secure retirement.
According to Standard Life, almost 60% of Gen Z workers mistakenly believe auto-enrolment alone will provide a comfortable pension, despite industry experts warning it falls far short of long-term adequacy.
The government revived the Pensions Commission in July to address the looming retirement crisis, but Barnett Waddingham warned that reform must not come at the expense of business survival.
Willis urged a careful approach: “We need a balanced, sustainable strategy that strengthens retirement outcomes while protecting the financial continuity of UK employers.”
With insolvency risks rising and labour market fragility increasing, any move to raise employer pension obligations is likely to intensify calls for phased implementation, tax incentives or offsetting measures to protect smaller firms.
As the 26 November Budget approaches, the government faces a difficult trade-off: improve pension adequacy now — or risk placing more companies under financial strain and triggering job losses in the process.
