Chancellor Rachel Reeves has delivered the Government’s Autumn Budget 2025, and if you’re an employer, there’s plenty to digest. Several significant changes are coming that will affect your payroll, pension schemes, and workforce planning. Here’s what matters most.
Wage Increases on the Horizon
From 1 April 2026, the National Living Wage rises by 4.1% to £12.71 per hour for workers aged 21 and over. For someone working full-time (37.5 hours weekly), that’s roughly £900 more per year.
Younger workers will see even sharper increases. The National Minimum Wage for 18-20 year olds jumps by 8.5% to £10.85 per hour, while rates for 16-17 year olds and apprentices increase by 6% to £8.00 per hour.
These changes signal the Government’s long-term ambition to align all adult rates into a single National Living Wage. However, employment groups have raised concerns that such substantial increases for younger workers, combined with other rising employment costs, could inadvertently impact youth employment opportunities.
The Pension Salary Sacrifice Cap: A Fundamental Shift
Perhaps the most significant change for many employers concerns pension contributions. From 2029, National Insurance relief on salary sacrifice pension contributions will be capped at £2,000 per employee per year.
The rationale? The cost of salary sacrifice relief was forecast to increase from £2.8 billion in 2016-17 to £8 billion by 2030-31, with higher earners benefiting disproportionately while minimum wage employees remain excluded entirely.
The Government maintains that 74% of basic rate taxpayers currently using salary sacrifice won’t be affected by the £2,000 cap. But for contributions above this threshold, both employee and employer National Insurance will apply as standard.
It’s crucial to understand: this doesn’t touch the tax relief on pension contributions themselves (worth over £70 billion annually). But it does fundamentally alter how many employers structure their pension schemes, and those with higher-earning workforces need to pay attention.
The Bigger Picture: Cumulative Cost Pressures
These announcements don’t exist in isolation. Remember that employer National Insurance contributions already increased by 1.2 percentage points to 15% in April 2025, the single largest tax increase from the Autumn Budget 2024.
Put today’s National Living Wage increases on top, and it’s clear: payroll costs are heading upwards. Sectors heavily reliant on minimum wage workers such as, hospitality, retail and social care, these will feel it the most.
What Should Employers Do Now?
Review Your Payroll Budgets
Factor the April 2026 wage increases into your 2026-27 planning now, not later. Make sure your payroll systems are ready to implement the new rates from 1 April 2026.
Assess Your Pension Arrangements
If you offer salary sacrifice pension schemes, model how the 2029 changes will affect your higher earners. You may need to adjust scheme communications or even restructure your approach entirely.
Plan for Cumulative Costs
Don’t view these changes in isolation. Consider the combined effect of employer NI increases, wage rises, and the forthcoming Employment Rights Bill provisions when making workforce decisions.
Update Contracts and Policies
Ensure all minimum wage workers will receive automatic increases from April 2026. Review how the age-related rate changes affect your specific workforce composition.
Stay Alert
While the Government has committed to one major fiscal event per year, implementation guidance on the pension salary sacrifice changes will be forthcoming. Keep an eye out for clarifications and further details.
Our employment law specialists at Farleys are on hand to advise and review your employment contracts, policies and procedures. Get in touch today by email, or through the online chat below.
