Payroll update – National Minimum Wage and National Living Wage changes announced in the Budget

In October’s Budget, the Chancellor unveiled increases to the National Minimum Wage (NMW) and National Living Wage (NLW), set to take effect from April 2025.

These changes represent the Government’s ongoing commitment to supporting workers amidst the rising cost of living, but they also present challenges for employers, particularly in managing payroll compliance and cost planning.

What are the changes?

From April 2025, the new NWM rates will be:

  • NLW (21 and over) – Increasing from £11.44 to £12.21 per hour. a 6.7 per cent rise
  • 18–20-year-olds – Rising from £8.60 to £10.00, a 16.3 per cent increase
  • Apprentices – Now £7.55, an 18 per cent increase

For a full-time worker on the NLW working 37.5 hours per week, this equates to an annual minimum wage of approximately £23,800.

These increases continue the trend of steep rises in recent years and with the Low Pay Commission’s remit now including forward-looking inflation considerations, further substantial increases are likely in the years ahead.

With these changes less than six months away, what are the key implications for businesses?

Increased financial burden

Employers will need to assess how to fund these wage increases.

For many, this will involve reviewing budgets and considering adjustments to pricing, staffing levels, or operational efficiency.

Impact on pay structures

The continued increases in NMW and NLW rates have caused a bunching effect at the lower end of many pay structures, making it harder to differentiate between pay bands.

Employers may need to revise their pay frameworks to maintain fairness and motivation across roles.

Risks with salary sacrifice and deductions

Employers offering benefits through salary sacrifice schemes, such as pension contributions or cycle-to-work schemes, should be cautious.

Such deductions could inadvertently reduce an employee’s pay below the legal minimum, potentially putting the employer in breach of NMW laws.

Greater enforcement activity

The Government is increasing scrutiny of NMW compliance, and enforcement activity is expected to ramp up further under the proposed Fair Work Agency, which will replace HM Revenue & Customs’ (HMRC’s) NMW unit.

The new body will likely oversee both NMW and holiday pay compliance when it becomes operational in the 2026–2027 financial year.

What should businesses do now?

To prepare for these changes and mitigate risks, businesses should:

  • Ensure payroll systems are updated to reflect the new NMW and NLW rates
  • Confirm that deductions do not inadvertently reduce employee wages below the legal minimum
  • Address bunching at the lower end of pay scales to maintain clarity and fairness
  • Regularly review pay records to ensure compliance, especially if employing young workers or offering benefits via deductions
  • Build flexibility into budgets to accommodate further rises in NMW and NLW rates

Don’t wait until the April 2025 deadline, reach out to us today to ensure your payroll systems are compliant and ready for the upcoming changes.

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