What the Autumn budget 2025 means for HR leaders
The 2025 Autumn budget just changed the rules for supporting your people
Employment costs are rising. Compliance is getting more complex. Your people need more support. Here's what changed on November 26th, what's likely to change in 2026, and what works when budgets are tight.
- Changes already in effect from the November Budget
- What's likely to change in 2026
- Why this matters for your wage bill
- What works: Practical options for HR leaders
- Common questions answered
Changes already in effect from the November budget
The November 26, 2025 Budget introduced immediate changes that affect every UK employer's cost base. Here's what you need to know.
The National Living Wage rose to £12.21 per hour, a 6.7% increase (GOV.UK, National Living Wage announcement, October 2024). For a full-time worker on minimum wage, that's an extra £1,400 annually. While this supports employees facing cost-of-living pressures, it creates three immediate challenges for employers:
National living wage increased to £12.21/hour
If you employ minimum wage workers, your wage bill just increased by 6.7% for those roles. For a company with 50 full-time minimum wage workers, that's an additional £70,000 in annual payroll costs.
Entry-level workers now earn closer to mid-level employees. This creates pressure to increase salaries across your entire pay structure to maintain differentials (Lewis Silkin, "What's happening in UK employment law in 2025?", January 2025). A £1 difference in 2024 might need to become a £1.50 difference in 2025 to feel meaningful.
The minimum wage for 18-20 year olds jumped 16.3% to £10.00 per hour—the biggest increase on record (Irwin Mitchell, Employment Law Changes 2025). If you employ younger workers in entry-level roles, the cost impact is even more pronounced.
Employer national insurance contributions
The changes to National Insurance Contributions mean that every salary increase now carries a higher multiplier effect. When you increase an employee's salary by £2,000, you're committing to £2,300 in additional annual costs once employer NI is included (based on current 15% employer NI rate).
This fundamentally changes the economics of pay rises. A 3% cost-of-living adjustment for a workforce of 500 employees with an average salary of £35,000 costs you:
- Direct salary increase: £525,000
- Additional employer NI (at 15%): £78,750
- Total cost: £603,750
Pension auto-enrollment adjustments
Minimum pension contributions remain at 8% of qualifying earnings (5% employer, 3% employee), but changes to qualifying earnings thresholds mean more employees qualify and contribution amounts may increase for existing participants.
The combination of higher wages and unchanged percentage contributions means higher absolute costs. An employee earning £30,000 requires employer pension contributions of approximately £1,125 annually. After minimum wage increases, that same role might now cost £1,200 in pension contributions alone.
What stayed the same (for now)
Despite speculation leading up to the Budget, several critical elements affecting employee benefits remained unchanged:
Tax relief on salary sacrifice schemes
Employees still save both Income Tax and National Insurance on amounts sacrificed for qualifying benefits. Employers still benefit from reduced NI contributions. This means salary sacrifice remains one of the most cost-effective ways to support employees.
Benefit-in-kind rates for electric vehicles
BiK rates for EVs remain locked at their previously legislated levels through 2029. The 3% rate for 2025/26 rises gradually to 9% by 2029, but these rates are protected from further increases. This makes EV salary sacrifice schemes one of the most secure long-term benefits options.
Childcare voucher tax advantages
Childcare voucher tax advantages
The tax treatment of childcare vouchers through salary sacrifice remains unchanged, providing up to £243 monthly savings for basic rate taxpayers.
Cycle to Work scheme
Tax relief continues for bike purchases through salary sacrifice, with employees saving up to 42% on costs.
What's different in 2025 vs. 2024
Understanding the year-on-year change helps put your budget planning in context:
| Cost element | 2024 | 2025 | Change |
| National Living Wage | £11.44/hour | £12.21/hour | +6.7% |
| 18-20 minimum wage | £8.60/hour | £10.00/hour | +16.3% |
| Employer NI rate | 13.8% | 15% | 8.69% |
| Annual cost for £30k employee* | £33,489.40 | £34,462.80 | +2.9% |
*Includes salary, employer NI (15%), and employer pension contribution (5% of qualifying earnings).
The bottom line: For a mid-sized company with 300 employees and an average salary of £35,000, the minimum wage increases and NI changes could add £250,000-350,000 to annual employment costs—even before you consider any merit increases or cost-of-living adjustments for existing staff.
Whats likely to change in 2026
While the November Budget set immediate changes in motion, several policy shifts are expected or under consideration for 2026. Understanding what's coming helps you plan now rather than react later.
Salary sacrifice arrangements under scrutiny
Pension contributions
There's speculation about a potential £2,000 annual cap on National Insurance relief for pension salary sacrifice contributions. This remains unconfirmed, but it's being discussed in Treasury circles as a way to reduce the cost of tax relief to the Exchequer.
What this means for you
If implemented, this wouldn't affect most employees (£2,000 is approximately £167/month), but would impact higher earners making substantial pension contributions. Watch for clarification in Spring 2026 fiscal announcements.
What's protected
Electric vehicle salary sacrifice schemes are explicitly protected with locked-in BiK rates through 2029. The government's commitment to EV adoption means these schemes face minimal risk of adverse changes.
Planning consideration
Don't pause your benefits review due to speculation. Focus on schemes with legislative protection, and ensure any new arrangements include flexibility to adjust if regulations change.
Tax thresholds and fiscal drag
Personal tax thresholds remain frozen, meaning more employees will drift into higher tax brackets as wages increase. This creates a counterintuitive problem: a pay rise could reduce an employee's net income if it pushes them across a threshold.
Example: An employee earning £49,500 receives a £2,000 pay rise, taking them to £51,500. They now earn £1,270 above the higher rate threshold. On that £1,270, they pay 40% tax instead of 20%—costing them an extra £254 annually. Combined with NI, their net benefit from the £2,000 raise is approximately £1,306, not the £1,560 they'd expect from a straightforward calculation.
Why this matters: When discussing pay with employees, you need to help them understand the real value of salary increases versus tax-efficient benefits. A £2,000 raise might not deliver what they expect, but £2,000 worth of benefits delivers full value.
Compliance and reporting requirements multiply
The Employment Rights Bill introduces 28 separate reforms that begin implementation in 2026 (Lewis Silkin, "What's happening in UK employment law in 2025?", January 2025). While these focus on employee rights rather than benefits directly, they significantly increase HR's administrative workload:
Day one rights
Unfair dismissal protection
Unfair dismissal protection from first day of employment (Farrer & Co, "Employment Law 2025: key updates", January 2025)
Statutory Sick Pay
Statutory Sick Pay for all employees, removing the lower earnings limit (Acas, Employment Rights Bill guidance, 2025)
Flexible working requests
Flexible working requests must be considered from day one (Goodwin, "Horizon Scanning: UK Employment Law Developments 2025", January 2025)
Zero-hours contract reforms
Workers regularly exceeding contracted hours gain rights to guaranteed hours contracts reflecting actual work patterns over 12-week periods (Addleshaw Goddard, "What to expect in employment law for 2025"). This requires tracking and monitoring systems that many employers don't currently have.
New reporting requirements:
- Gender pay gap action plans become mandatory for employers with 250+ employees (Addleshaw Goddard, "What to expect in employment law for 2025")
- Menopause support must be included in equality action plans (Addleshaw Goddard, "What to expect in employment law for 2025")
- Sexual harassment prevention duties require proactive policies (Acas, Employment Rights Bill guidance, 2025)
The HR capacity challenge
As compliance complexity explodes, the administrative time spent managing fragmented benefits systems becomes unsustainable. Consolidating onto unified platforms isn't just about cost—it's about having the capacity to handle everything else coming your way.
Tax relief on salary sacrifice schemes
What the office for budget responsibility projects:
- GDP growth of just 1.0% in 2025 (significantly below trend) (GOV.UK, Office for Budget Responsibility)
- Recovery to 1.9% growth in 2026 (Edinburgh Chamber of Commerce)
- Steady growth of 1.7-1.8% from 2027-2029 (Office for Budget Responsibility)
- Unemployment peaking at 4.5% in 2025, then declining to 4.1% by 2028 (Office for Budget Responsibility)
What private forecasters expect
What private forecasters expect
- British Chambers of Commerce: 1.3% growth in 2025, 1.2% in 2026 (British Chambers of Commerce)
- CBI: 1.2% growth in 2025, 1.0% in 2026 (CBI)
- EY ITEM Club: 1.5% growth in 2025, but unemployment peaking at 5.0% in early 2026 (Ernst & Young)
What this means for HR leaders
Employment conditions favor employers in 2025-2026. With higher unemployment, employees have less negotiation power and fewer outside options. This creates both an opportunity and a risk:
The opportunity
You can focus on cost-efficient support mechanisms (benefits, wellbeing, flexibility) rather than engaging in salary bidding wars you can't afford.
The risk
If employees feel unsupported during difficult times, they'll remember when employment options improve in 2027. How you treat people now determines whether they choose to stay with you later.
The exception
Skills-short sectors (engineering, IT, specialist manufacturing) will continue facing hiring challenges even during elevated unemployment. If you're in these sectors, retention remains critical regardless of broader economic conditions.
Why this matters for your wage bill
Understanding the abstract policy changes is one thing. Seeing how they affect your actual costs is another. Here's what the Budget changes mean in practical terms.
The hidden cost of wage bill increases
When you tell an employee they're getting a £2,000 pay rise, here's what actually happens.
What the employee receives
- Gross increase: £2,000
- Income tax (20% for basic rate): -£400
- Employee NI (12%): -£240
- Net benefit to employee: £1,560
What private forecasters expect
What it costs your business:
- Gross salary increase: £2,000
- Employer NI (15%): +£300
- Increased employer pension contribution: +£100
- Total cost to employer: £2,400
What it costs your business:
The gap: Your business spends £2,376 to put £1,560 in the employee's pocket. That's only 66% efficiency.
Now consider if that £2,000 pushes them into a higher tax bracket:
- Additional higher-rate tax: -£254
- Net benefit to employee: £1,306
- Efficiency drops to 55%
The wage compression challenge
Minimum wage increases don't happen in isolation. They create pressure waves that ripple through your entire pay structure.
A typical scenario
What the employee receives
- Entry-level role: £11.44/hour (£23,795 annually)
- Experienced team member: £14.00/hour (£29,120 annually)
- Differential: £2.56/hour (22%)
After November 2025
- Entry-level role: £12.21/hour (£25,397 annually)
- Experienced team member: Still £14.00/hour (£29,120 annually)
- Differential: £1.79/hour (15%)
The experienced employee now feels undervalued. The 22% pay differential they earned through experience and performance has shrunk to 15% overnight—through no fault of the business, but they don't see it that way.
Your choices
- Maintain the percentage differential: Increase experienced worker to £15.43/hour (£32,094 annually). Cost: £2,974 per employee.
- Maintain the absolute differential: Increase to £14.77/hour (£30,722 annually). Cost: £1,602 per employee.
- Do nothing and risk disengagement: £0 immediate cost, but potential productivity loss, retention issues, and cultural damage.
Multiply across your workforce: If you have 200 employees affected by wage compression, maintaining differentials could cost £300,000-600,000 annually depending on your approach.
Why traditional approaches aren't working
Base salary increases alone trigger cascading costs:
For a 500-person workforce with average salary of £35,000, a 3% cost-of-living increase costs:
- Year 1: £597,450 (including employer NI)
- Year 2: Same percentage on higher base = £615,177
- Year 3: £633,732
-
Three-year cost: £1,846,359
These increases compound annually and become permanent fixed costs regardless of business performance.
Housing costs up
Housing costs up 8.7% year-over-year, far outpacing both inflation (3%) and wage growth (5.9%) (Office for National Statistics, cited in UK Income & Growth, February 2025)
Food prices higher
Food prices 27% higher than April 2022—a basket of goods costing £40.96 in April 2022 now costs £52.13 in January 2025 (Food Foundation, cited in Joseph Rowntree Foundation Cost of Living Tracker, Summer 2025)
Childcare prices
Childcare averaging £15,865 annually for full-time nursery care for under-2s (Coram Family and Childcare, cited in MadeForMums, March 2025)
Essentials
7.1 million low-income households still going without essentials, unchanged since October 2022 (Joseph Rowntree Foundation, Cost of Living Tracker, Summer 2025)
Essentials
A 3% pay rise doesn't move the needle on a £15,865 childcare bill. It adds £1,050 gross (£819 net) to a £35,000 salary, while housing costs alone could be increasing by £1,500+ annually.