You are confusing the function $f$ with the direct image function that $f$ induces.
Recall that if $X$ and $Y$ are sets, and $f\colon X\to Y$ is a function, then $f$ induces a function, often denoted also by $f$ but which I will call $\underline{f}$,
$$\underline{f}\colon\mathcal{P}(X)\to\mathcal{P}(Y),$$
given by
$$\underline{f}(A) = \{f(a)\mid a\in A\}$$
for all $A\subseteq X$.
The function $f$ defined by $f(n)=n+1$ will map the element $\emptyset$ to the element $\{\emptyset\}=1$. The function $\underline{f}$ will map the subset $\emptyset$ to the subset $\emptyset$.
(Note that this is not the only problem with the notation: under the usual definition of $\mathbb{N}$, $\mathbb{N}$ is a transitive set: if $a\in \mathbb{N}$, then $a\subseteq \mathbb{N}$. Thus, $1 = 0\cup\{0\} = \{\emptyset\}$, and $\emptyset\subseteq\mathbb{N}$. So while $f(1)=2=\{0,1\} = \{\emptyset,\{\emptyset\}\}$, we also have $\underline{f}(1) = \underline{f}(\{\emptyset\}) = \{f(\emptyset)\} = \{f(0)\} = \{1\}\neq 2$. So here it is important to keep the distinction between $f$ and $\underline{f}$ clear, if it is not obvious from context.)