The Labour Government’s Autumn Budget, announced yesterday by Rachel Reeves, outlined some expected changes in business taxation and employment regulation. Following months of speculations and high-profile leaks, the Government faced pressure both to raise funds and respond to lobbying from businesses to curb the increase of employment costs. The Budget introduces several measures that will affect employers and employees. Although some of the rumoured tax rate increases were absent, frozen income tax and National Insurance Contributions (NICs) thresholds will still mean higher tax payments in the years ahead.
Key announcements affecting employers
- Frozen tax thresholds
The thresholds for personal income tax and employer NICs shall be frozen for another three years from 2028-29 until April 2031, as follows:- income tax personal allowance at £12,570;
- the higher rate threshold at £50,270; and
- the additional rate threshold at £125,140.
This forms part of the Government’s wider plan to raise desperately needed funds with hopes that the freeze will generate more than £12 billion by 2031.
- Increase to the National Minimum Wage and Living Wage
As recommended by the Low Pay Commission, the National Minimum Wages (NMW) and National Living Wage (NLW) hourly rates will rise from 1 April 2026 as follows:- 21 and over: £12.71 (up from £12.21)
- 18-20: £10.85 (up from £10)
- 16-17 and apprentices: £8 (up from £7.55)
The higher 8% increase for 18-20 year old’s is intended to bring the rate in line with the main NLW rate over time, as set out in the Government’s manifesto commitment to abolish age banding for minimum pay rates for over 18s.
The hourly wage increase will translate into higher costs for employers and might affect jobs for young people in particular, such as graduate jobs and entry level roles. Although some businesses may want to offer higher salaries to remain competitive, this will be tempered by the increased costs of hires and new employment rights within the Employment Rights Bill. In fact, the increases may well lead to hire freezes, bans on pay rises or even cost saving measures, such as redundancies.
Tax on salary sacrifice pension contributions
It is estimated that around one-third of private sector employees in the UK contribute to their workplace pension via a salary sacrifice arrangement. At the moment, such pension contributions are treated as employer contributions and are exempt from both employer and employee NICs. One of the changes announced by Ms Reeves yesterday is that from April 2029, any salary sacrifice pension contributions above £2,000 per annum will be subject to NICs.
Please note, this new limit only applies in relation to salary sacrifice for pension contributions and won’t affect arrangements such as tax-free childcare. Employer pension contributions that are not made via salary sacrifice will also not be affected by the change and remain exempt from NICs.
The change may prompt employers to reconsider their pension contribution levels. Employees may also be more likely to opt out of pension schemes to increase their immediate take-home pay. The three-year implementation window gives employers time to review their approach and consult with staff where required.
How might this affect businesses?
Employers should review the realistic impacts on employment costs such as salary, benefits and the proposed legislative changes in the Employment Rights Bill.
This squeeze on take home pay is likely to increase employee expectations around wages and benefits, making salary negotiations tougher.
Employment costs have been gradually increasing even before this Budget was announced, and now there is even less wiggle room for employers to find ways to offer comfort and incentivise their staff.
Some employers have announced that they will increase their hourly wages ahead of the deadline as a gesture of goodwill and support for their employees. Others are looking for new and more extensive company benefits such as group corporate discounts, free financial planning and pension workshops or subsidised canteen options to help alleviate some of the financial strain.
Looking ahead, it will be interesting to see whether the predicted revenue boost materialises or whether businesses simply tighten budgets and adjust spending instead. Our employment team is here to help if you have any questions about how these changes affect you.
