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Costs

Chancellor Rachel Reeves delivered Labour’s first Budget in 15 years, with significant implications for UK businesses.

The Government’s economic plans were trailed extensively in the media before today’s announcement, so employers were to some extent braced for impact. However, there is still lots of detail to unpack from the Chancellors lengthy and wide-reaching speech.

Hailed by commentators as a directional shift in economic approach, the Chancellor had promised that her inaugural Budget would keep Labour’s manifesto promise not to increase taxes on ‘working people’. It appears that this commitment has been honoured, as there have been no direct increases in income tax, Employees National Insurance or VAT. Payslips have largely been protected, with employers taking the financial hit instead.

National Minimum Wage/National Living Wage

The Government’s headline employment announcement is a significant increase in National Minimum Wage rates, based on the recommendations of the Low Pay Commission. The real-world cost of living has been factored into statutory minimum rates for the first time (previously these have been based solely on average wages).

The top rate of the NMW (known as the ‘National Living Wage’/NLW) will increase by 6.7 % to £12.21 per hour (up from the current rate of £11.44). This rate is payable to all staff aged 21yrs or over from April 2025.

Labour has pledged to abolish the current NMW/NLW age bands, in favour of a single adult rate. However, this will be achieved incrementally. As a first step, the current rate of £8.60 for staff aged 18-20yrs will be increased by a huge 16.3% to £10 per hour in April 2025. The rate will further increase in subsequent years to reach parity with the top rate.

Employers National Insurance

The Budget confirmed that the rate of Employers National Insurance will rise to 15% in April 2025 (an increase of 1.2%). This is at the lower end of expectations, as an increase of up to 2% had been rumoured.

Significantly, the secondary threshold at which employers start paying National Insurance for a particular employee will decrease. Currently, employers are only liable to pay NI for staff earning more than £9,100 per year. From April 2025 this will be reduced to £5,000 meaning that many more low-earning staff will be captured.

However, there is an important olive-branch for smaller employers, as Employment Allowance (essentially an Employers National Insurance rebate) will more than double from the current rate of £5,000 to £10,500. This will increase the number of small businesses that will not be liable to pay Employers National Insurance at all. The Chancellor stated in her speech that business should be able to employ four full-time workers on the NLW without paying any National Insurance.

Income tax

The current bands that apply to employee income tax have been frozen since 2021 – and were set to remain frozen until April 2028. It was rumoured that the Chancellor would use the Budget to extend this freeze for a further 2 years until April 2030. However, she declined do this, sticking with the April 2028 review date.

This may be to avoid accusations of a ‘stealth-tax’ on employees through the phenomenon of ‘fiscal drag’ (where employees may find themselves in a higher tax bracket due to ordinary wage inflation, even though their earnings have not increased in ‘real terms’).

Until April 2028, income-tax brackets will remain as currently, with the basic rate of 20% applying to earnings over £12,570, the higher rate of 40% applying to earnings over £50,270 and the additional rate of 45% kicking in at £125,140 and above.

Other news

There was a strong focus in the Budget on tackling ‘economic inactivity’ with the establishment of ‘Skills England’, a new body charged with delivering the Government’s plan to ‘Make Work Pay’. Further detail is expected to follow in a ‘Get Britain Working’ white paper due later this Autumn.

The Chancellor also made fleeting reference in her speech to Labour’s plans to strengthen employee protections against unfair dismissal, combat bullying in the workplace and to increase access to maternity and paternity leave.

Comment

Some employers may be feeling bruised by today’s policy announcements.

To put the NMW/NLW changes in context, these significant hikes follow close on the heels of big increases earlier this year. In April 2024, the NLW was extended to 21 and 22-year-olds for first time alongside an increase of around 10% (almost double what most employers were planning for at the time). Today’s announcement means that employers will have to absorb an NLW increase of almost 17% in the space of just two years. While the Government’s intentions are laudable, this will be a tough blow to take for many businesses.

The impact of wage rises will undoubtedly be felt most sharply in sectors such as retail and hospitality where NMW widely paid. Many employers in these sectors may struggle to maintain pay differentials, with managers earning only a modest amount more than the staff they supervise, resulting in recruitment and retention issues. Employers proud of paying over the NMW/NLW may no longer be able to afford to do so. There is some suggestion that scrapping the NMW/NLW age-bands may discourage businesses from employing younger workers, who may be perceived to lack experience and will no longer represent a cost-saving.

The increase in Employers National Insurance is a considerable added pressure. The decrease in the Employment Allowance threshold to £5,000 means that employers will be liable to pay NI for employees earning as little as £100 per week approximately. This will capture many casual and low-hours workers.

Crucially, the NHS and the rest of the public sector will be exempt from this tax rise. However, it appears the exemption will not cover private care homes and hospices, and there is some confusion about how GP surgeries delivering NHS services will be impacted

Coupled with the anticipated cost of compliance with Labour’s flagship employment reforms in the Employment Rights Bill (such as Day 1 rights to unfair dismissal) the announcements may feel daunting.

If you have any questions or concerns, please do not hesitate to contact your usual Weightmans advisor.