Chancellor Rachel Reeves delivered the Government’s Autumn Budget 2025 yesterday and announced several key changes which will significantly impact employers and employees across the UK. See below for the employment-related announcements.
National Living Wage and Minimum Wage Increases
The most immediate change for employers concerns statutory pay rates. From 1 April 2026, the National Living Wage will increase by 4.1% to £12.71 per hour for workers aged 21 and over. This represents an annual increase of approximately £900 for full-time employees working 37.5 hours per week.
More significantly, younger workers will see substantial increases. The National Minimum Wage for 18-20 year olds will rise by 8.5% from £10.00 to £10.85 per hour, whilst rates for 16-17 year olds and apprentices will increase by 6% to £8.00 per hour.
These changes reflect the Government’s stated ambition to eventually align all adult rates into a single National Living Wage, though concerns have been raised by employment groups that the sharp increases for younger workers could impact youth employment opportunities, particularly when combined with other rising employment costs.
Pension salary sacrifice cap
One of the most significant employment-related changes announced concerns pension contributions made through salary sacrifice arrangements. From 2029, the Government will cap National Insurance relief on salary sacrifice pension contributions at £2,000 per employee per year.
The Chancellor justified this measure by noting that the cost of salary sacrifice relief was forecast to increase from £2.8 billion in 2016-17 to £8 billion by 2030-31, with benefits disproportionately going to higher earners while minimum wage employees are excluded entirely. The Government states that 74% of basic rate taxpayers currently using salary sacrifice will be unaffected by the £2,000 cap. However, for contributions above this threshold, both employee and employer National Insurance will be charged in the usual way.
Importantly, this does not affect the generous tax relief on pension contributions themselves, worth over £70 billion annually, but it does represent a fundamental change to how many employers structure their pension schemes.
Employment cost pressures continue
Employers should note that today’s Budget comes against a backdrop of significant employment cost increases introduced in the Autumn Budget 2024. Specifically, employer National Insurance contributions increased by 1.2 percentage points to 15% from April 2025, representing the single largest tax increase of that Budget.
Combined with the new National Living Wage increases announced today, employers face continued upward pressure on payroll costs. Sectors with high proportions of minimum wage workers, particularly hospitality, retail, and social care, will be most affected by these changes.
What should you be doing as an employer?
Employers should consider the following immediate actions:
Review payroll budgets: Factor in the April 2026 wage increases when preparing 2026-27 budgets and ensure systems are ready to implement the new rates from 1 April 2026.
Assess pension arrangements: Employers offering salary sacrifice pension schemes should model the impact of the 2029 changes, particularly for higher earners, and consider whether scheme communications or structures need adjustment.
Plan for cumulative costs: Consider the combined effect of employer NI increases, wage rises, and forthcoming Employment Rights Bill provisions when making workforce planning decisions.
Update employment contracts and policies: Ensure all minimum wage workers will receive automatic increases from April 2026, and review how age-related rate changes affect your workforce.
Monitor further developments: The Government has committed to one major fiscal event per year, but employers should stay alert for implementation guidance on the pension salary sacrifice changes and any clarifications on the measures announced today.
How can we help?
Rachel Hatton is a Partner in our expert Employment Law team.
Rachel has a strong reputation in all aspects of employment law, both advising employers generally on how to deal with employees in the workplace (covering disciplinary and grievance matters, redundancy, TUPE etc) together with extensive Employment Tribunal litigation experience covering complex discrimination, whistleblowing and dismissal claims and also has particular experience in developing HR support services for businesses.
For more information or to discuss your specific circumstances, please call 0800 024 1976 or contact us via our our online enquiry form.
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