The UK’s annual inflation rate climbed to 3.5% in April 2025, up from 2.6% in March, marking the highest level in over a year and exceeding most economists’ expectations. This rise comes at a time when both households and businesses are grappling with a range of cost increases, from household bills to business overheads.

What caused the increase?

There were several factors that contributed to the sharp rise:

• Housing and Utilities: The largest upward push came from higher household bills, particularly water, gas, and electricity. On 1 April, water and sewerage prices soared by over 26%, the steepest increase since at least 1988. The energy regulator, Ofgem, also raised the cap on energy bills by 6.4%, increasing the average annual household bill to £1,849.
• Business Costs: Employers faced higher labour costs due to increases in the National Minimum Wage and employer National Insurance contributions (NICs). The National Living Wage rose to £12.21 per hour, and employer NICs increased from 13.8% to 15%, with the threshold at which NICs are payable lowered to £5,000. These changes have contributed to a rise in services inflation, which reached 5.4% in April.
• Core Inflation: Even when volatile food and energy prices are excluded, core inflation remains elevated, indicating broader price pressures across the economy.

Economic context and outlook

The Bank of England’s inflation target remains at 2%, but recent figures have pushed inflation well above this level. 

Before April’s data, there was a fairly strong feeling that there would be two further interest rate cuts in 2025. Now, many economists believe only one may occur, as the Bank becomes more cautious. 

The Bank of England projects that inflation could peak at 3.7% later this year before gradually easing back towards the 2% target, though there are risks that price pressures could persist if services inflation remains high.

Practical steps to take…

With costs rising across the board, what can you do to manage your finances and safeguard profitability? Here are a few suggestions for you:

• Review Payroll Budgets: With higher minimum wages and increased employer NICs, labour costs will be significantly higher. Make sure you’ve analysed your payroll costs and considered whether you need to adjust staffing levels or working hours.
• Monitor Utility and Service Costs: Keep a close eye on your utility contracts and service providers. If you haven’t already, consider renegotiating terms or seeking more competitive rates where possible.
• Adjust Pricing Strategies: Assess whether you can pass on some of the increased costs to your customers. This may be a tricky one to implement, but we’re here to help if you’d like to chat through the necessary calculations or implementation. 
• Optimise Tax Efficiency: Make sure you’ve taken advantage of the increased Employment Allowance, which has risen to £10,500, and ensure you are claiming all available reliefs.
• Plan for Cash Flow Challenges: Higher costs and potential delays in customer payments can strain the strongest cash flow. Make sure you have accurate forecasts that are kept up to date and consider increasing the size of your buffer in case of unexpected expenses.
• Stay Informed: Be sure to keep up to date with economic changes and HMRC announcements. Changes in interest rates, inflation, and tax policy can all impact your business planning.

Looking ahead…

While inflation is expected to ease later in the year, the current environment is challenging for businesses of all sizes. Managing costs and planning carefully will be essential to maintain profitability and resilience.

If we can help in any way with any of the above, please get in touch.