Analysis | How reward professionals can manage the impact of the Autumn Budget

Impacts of a rise in the National Living Wage 

The government had accepted the independent Low Pay Commission’s (LPC) recommendation that the National Living Wage (NLW) hourly rate should rise from £11.44 to £12.21 next April. This increase was higher than the LPC’s March 2024 (£11.89) or September (£12.10) predictions of how much the NLW would need to rise by. 

Based on the LPC’s September forecast, the CIPD’s Autumn 2024 LMO asked employers what the impact on their wage bill would be if the NLW rose to £12.10. Nearly seven in ten (69%) said it would increase their employment costs: 20% saying by a large extent, 32% by some extent and 17% by a small extent. The rest either said there would be no impact (25%) or were unable to make a forecast (6%). 

But employers in low-wage sectors such as hotels, catering and restaurants (48%), retail (32%), and wholesale (31%), were more likely to predict their wage costs would increase by a large extent.  

From previous CIPD research, we know that employers in low-wage sectors usually make up for rises in wage costs through raising prices, accepting higher overheads, increasing productivity (such as requiring staff to take on extra tasks) or employing fewer people.  

How will rising National Insurance contributions affect employers? 

Another major budget announcement was an increase in employer National Insurance contributions (NICs). From 6 April 2025, the employer rate of NICs will go up from 13.8% to 15% and organisations will start paying employer NICs on employee earnings from £5,000 a year, instead of £9,100. Many firms will also see their business costs rise from the budget announcement that the amount of relief they can claim on business rates will either be scrapped or reduced in the case of the retail, hospitality, and leisure sector. 

But the budget also announced an increase to the Employment Allowance from £5,000 to £10,500 per annum from next April. This will allow smaller organisations to claim more to cut their total annual employer National Insurance liability. Further, more employers will now be able to claim the allowance because the eligibility threshold for allowance will be axed. Previously, employers could only claim it if their total employer NICs were less than £100,000 a year.  

Yet many mid-sized and large employers will see still their employment costs rise. This will be especially true for those based in low-wage sectors, and we anticipate them to take a similar approach to mitigate the additional costs as from the rise in minimum wage.

How HR and reward professionals can help in the long-term 

The NLW increases are part of the government’s wider goals to improve the lives of workers through its ‘Make Work Pay’ plan. As well as requirement for the NLW to reflect the cost of living, the plan also includes changes to tipping rules, a fair pay agreement for social care, scrapping the lower earnings limit for statutory sick pay, and a right to guaranteed hours for zero-hours contracts. However, these new rules, plus the increase to the employer NICs, could result in the opposite of what the government hopes to see as employers seek ways to manage the sudden jump in labour costs. 

So how should reward professionals respond? If they don’t already, they should create a plan to ‘make pay work’ for their organisations. Does pay currently attract and retain the people needed both now and in the future? Does it encourage them to develop the skills and achieve the successes the workplace requires, or secure and support their financial wellbeing, or fairly reflects their performance, or provide enough for a reasonable standard of living? The answers to these and other questions will help reward professionals assess whether the money spent on pay is delivering value for the organisation and employees. If more had been doing this, perhaps there would have been less need for the ‘Make Work Pay’ plan. 

But creating a plan takes time. In the meantime then, what should reward professionals do now to prepare for higher employment costs coming down the line? First, find out how much costs will rise because of the higher NLW and employer NICs. Second, consider the potential responses, such as scaling back business investment or the benefit package. Third, consider the potential consequences, for example, how will employees, management, the unions, the investors, the media etc respond to these decisions? Fourth, what can we do to overcome their concerns and anxieties, and what compelling future can you offer? Fifth, what data do you need and where can you get it?  

Working out answers to these questions, whether with the help of CIPD resources in this area or through internal discussions, will allow reward professionals to take positive steps in ensuring that the new pay, tax and regulatory changes can be managed in a way that provides long-term stability for employees.