2025 Budget – Impact on employers
11th December, 2025
In her much anticipated Autumn budget, Chancellor Rachel Reeves unveiled a number of measures that will impact employers over the coming years.
From wage increases to pension reforms, the cost of employing people is increasing and businesses will need to prepare for both the financial and operational implications.
National Minimum Wage (NMW)
Effective 1 April 2026, the National Minimum Wage will rise across all age brackets:
- Age 16–17 and apprentices: from £7.55 to £8 per hour (6% increase)
- Age 18–20: from £10 to £10.85 per hour (8.5% increase)
- Age 21 and over: from £12.21 to £12.71 per hour (4.1% increase)
Certain sectors, such as hospitality, retail and leisure are likely to be significantly impacted by the change and the concern is that businesses hold off on hiring new staff or look to reduce headcount as a result. This is in particular the case for those employing people in the 18–20 age bracket, which has seen steep and consistent increases with the active aim of removing this pay differential altogether.
While these changes aim to support lower-paid workers, they also create challenges for employers. Whilst it is estimated that only around 8% of employees are paid at the national minimum wage, this doesn’t take into account businesses with staff earning slightly above the minimum wage facing wage compression, leading to employee relations issues as workers seek to maintain pay differentials.
Employers should review pay structures and communicate any changes with employees in light of these changes.
Salary Sacrifice Pension Cap is on its way
From April 2029, salary sacrifice pension contributions above £2,000 a year will attract National Insurance Contributions (NICS). Employees will pay national insurance on contributions above the annual threshold at a rate of 8% for basic-rate taxpayers and 2% for higher-rate taxpayers. Employers will pay national insurance at 15%.
Currently, such contributions are exempt from NICs, so this represents a material change when it does eventually take effect. The Office for Budget Responsibility (OBR) projects this measure will generate £4.7 billion in 2029-2030 and £2.6 billion in 2030-31. This measure will significantly reduce the attractiveness of salary sacrifice schemes, albeit the timing gives employers the chance to assess the financial impact and consider alternative benefit structures. A recent survey by the Reward and Employee Benefits Association indicates that 31% of businesses plan to reduce pension contributions in response to the cap.
Youth Guarantee and Apprenticeship Funding
Another change which doesn’t represent an immediate cost to employers is the Chancellor announced plans to address the estimated one million people aged 16–24 not in education, employment, or training. The government will allocate £820 million to fund a “youth guarantee” which offers work placements for 18–21 year-olds who have been out of education or employment for more than 18 months.
Additionally, SMEs will receive apprenticeship funding for under-25s, presenting an opportunity for businesses to strengthen their talent pipelines at no upfront cost.
Conclusion
The cost of being an employer continues to rise, and with the looming changes to employment legislation promised by the Employment Rights Bill, we are likely to see businesses faced with significant challenges in the coming months in terms of both the cost and management time involved in being an employer.
However, there is support available. For further information and support, please speak to your usual advisor, or contact one of our specialist Employment Solicitors.
Please note that this briefing is designed to be informative, not advisory and represents our understanding of English law and practice as at the date indicated. We would always recommend that you should seek specific guidance on any particular legal issue.
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