On 30 October 2024, the Chancellor, Rachel Reeves, delivered the government's first Budget. There were limited measures impacting directly on employers – the main one being an increase to the rate of employers' NICs. In her Budget speech, the Chancellor also provided some additional context to the announcement, on 29 October, of the NLW and NMW rates that will apply from April 2025.
Increases to NLW and NMW rates
On 29 October 2024, the government announced that it has accepted the recommendations of the Low Pay Commission (LPC) on increases to NLW and NMW rates.
From 1 April 2025, the NLW for those aged 21 and over will be £12.21 per hour (a 6.7% increase on the current rate), while the NMW for 18 to 20 year olds will rise by 16.3%, to £10.00 per hour. In the Budget speech, the Chancellor explained that this increase narrows the gap between the NLW and the adult NMW rate, consistent with the government's stated intention to move over time towards a single adult NLW rate for all those aged 18 and over, although the anticipated timeframe for this was not specified.
The NMW for 16 to 17 year olds and apprentices (aged under 19 or in the first year of their apprenticeship) will increase by 18% to £7.55 per hour.
This is the first time that the LPC's recommendations have taken into account the cost of living, after the government changed the LPC's remit in July 2024 to provide for this.
Employer NICs to increase
As the Chancellor announced in the Budget, from 6 April 2025, employers' NICs will increase from 13.8% to 15%, and the per-employee threshold at which employers must start to pay NICs will be reduced from £9,100.00 per year (£175.00 per week) to £5,000.00 per year (£96.00 per week). Employers will therefore have to pay NICs at 15% for each £1.00 an employee earns over that threshold – a change that is expected to bring in up to an additional £25 billion in revenue for the government in 2025-26.
However, in order to lessen the impact of the NICs rise on small businesses, the Budget also provides for an increase in the employment allowance from £5,000.00 to £10,500.00. This is an allowance that eligible employers can set off against their employer NICs liability – so if an eligible employer owes less than £10,500.00 in employer NICs in total across the tax year, they will not have to pay employer NICs at all.
What this means for employers?
The new minimum wage rates may entail significant additional costs for employers that pay their staff at or close to the NLW/NMW, especially when taking into account the need to maintain pay differentials between the lowest paid and more senior employees. It is also important to note that deductions made via salary sacrifice schemes are not permitted to reduce employees' pay below the NLW/NMW. Employers will therefore need to check that any existing salary sacrifice arrangements remain compliant once the new NLW/NMW rates take effect.
The additional costs of the increase in employer NICs are also likely to be substantial, with the Institute for Fiscal Studies calculating that employers will have to pay an extra £900.00 for each employee on median average earnings (£33,000.00).
While the precise mechanism has not been explained, it appears from the Budget document that the government has budgeted for an allowance to cushion certain public sector employers, including the NHS, from at least some of the impact of the NICs increase. However, at present, we understand that any allowance will not apply to private organisations that provide services to the NHS.
The government has acknowledged that the combined impact of these additional costs could reduce the level of pay increases that employers are able to offer going forwards. It is also possible that some employers may cut back on recruitment, or potentially seek to engage more staff as independent contractors – for whom they would not be responsible for NICs.
