After the Autumn Budget was announced on Wednesday, 30 October, the Chancellor Rachel Reeves admitted that some of the measures may have an impact on wage growth.
She added that the Office of Budget Responsibility has forecasted an increase in household incomes during this Parliament.
Reeves acknowledged the PS40 billion budget may have an impact on wage growth because of adjustments to employer national insurance contributions. The National Living Wage will increase by 6.7 percent from PS11.44 per hour to PS12.21 from April 2025. The government wants to bring National Minimum Wage and National Living Wage rates closer together.
Budget concerns from Business Organisations
Business groups have expressed concern over the combined impact of wage increases and NIC changes for employers. The Chartered Institute of Payroll Professionals warned that this increase could be a challenge, particularly for smaller businesses, which rely on young staff in the retail, hospitality and childcare sectors.
Employers will also see a 1.2 % increase in their NIC rates, going from 13.8 % to 15 %. Andrew Timpson of RSM UK’s employment tax partner noted that this could result in an additional PS940 per employee annually based on a UK average salary of PS36,000; NIC rates would therefore increase by approximately 3 percent. He said that the increased costs could put pressure on compensation structures, and possibly lead to job cuts in order to cover NIC costs.
Timpson stated that despite the negatives of the proposed employers’ NIC on pension contributions, they have not been implemented. Businesses that have been putting off implementing a pension arrangement salary sacrifice should do so as soon as they can to take advantage of the increased NIC savings.
The Chancellor’s Office has stated that this will be a softening of the blow for smaller businesses. They are to receive assistance with the Employment Allowance doubled from PS5,000 to £10,500. This adjustment allows eligible employers to hire four full-time National Living Wage employees without having to pay employer NIC.
Small Business Support Measures
Tina McKenzie, Policy Chair of the Federation of Small Businesses, praised the decision of raising the Employment Allowance.
Reeves budget also introduced a freezing of the small business multiplier for business rates. This was targeted at small businesses in various sectors. This freeze was introduced to help businesses who are facing an inflationary increase in tax on their premises. McKenzie stated that the measures in the budget, such as the extended relief on business rates for the hospitality, retail and leisure industries, provide some relief to companies.
McKenzie expressed concern about the challenges faced by small and medium businesses (SMEs) in dealing with increases in NIC, other employment costs and ongoing government employment laws.
She stated, “Larger, small and medium-sized businesses will struggle to cope with the increases in employer national insurance, on top of the high costs resulting from the government’s plans for employment law. We have been clear about the difficulties SMEs may face in adjusting to all these changes, and their potential impact on wages, prices and jobs.
The Budget documents include plans to create a command paper for small businesses, which is a positive signal that Ministers understand the important role small businesses play in driving the growth of the country. We look forward to working closely with the Government on this.”
“Creative Steps” for Alternative Rewards
Matt Russell, CEO at employee benefits technology provider Zest commented: “The increase in Employer National Insurance contributions may slow down salary growth, but employers will find creative ways to reward their employees that are more cost-effective than simply increasing wages. Employee benefits packages can be a very effective way for employers to provide financial support to employees. In the past 12 months, half of employers (49%) have increased their investment in benefits packages. This helps with talent retention and attraction as well as boosting morale.
Employees place increasing importance on the financial support they receive from their employers and don’t hesitate to change jobs in order to obtain the benefits they desire. Half (47%) of employees now state that a good benefit package is what they are looking for when they are searching for a job. Employers should not only increase investment in benefits, but also deliver enhanced value to employees by implementing their requests.
Salary sacrifices are another option that employers can use to reduce the impact of increasing NI contributions. This approach benefits both employees and employers.
