The Labour government’s 2024 Autumn Budget brings significant changes for employers in the UK. Right Honourable Rachel Reeves has emphasised Labour’s commitment to an economy that “works for everyone,” aiming to balance worker benefits and support for businesses. The response on social media has been largely in favour of the new budget from those citing themselves to be an “Ordinary Worker”, with many comments suggesting Labour has delivered on its promise to not impact payslips. However, the announced increases to the National Living Wage, employer’s National Insurance contributions, and changes to business rates have sparked concern, especially among smaller businesses already operating on tight margins.
In this article, we’ll dissect what these key updates from the new budget mean for employers and payroll in particular.
As outlined in the June 2024 manifesto, Labour will not be increasing National Insurance (NI) for employees. However, the budget raises employer’s NI contributions by 1.2%, now reaching 15%, a move that has drawn concerns from smaller enterprises. Additionally, the Secondary Threshold, the level at which employers begin paying National Insurance for each employee, will be reduced from £9,100 to £5,000 annually. This shift means that for every employee earning above the threshold, businesses will see up to £615 in additional costs per employee. For many employers, this change could mean reallocating funds within already limited budgets.
To alleviate the NI impact for small businesses, Employment Allowance will increase from £5,000 to £10,500, meaning around 865,000 businesses won’t pay any National Insurance in 2025. The government estimates this increase saves employers the equivalent of employing four full-time workers at National Living Wage levels before National Insurance costs apply.
Whilst the increase in the employer rate was anticipated (and largely predicted to be 2%) the change of threshold was a more unexpected change.
The Low Pay Commission (LPC) has influenced the recent increase in the National Living Wage (NWL) to £12.21 for those over 21, which will go into effect in April 2025. For full-time employees, this update translates to a monthly net pay increase of £85.08, after accounting for taxes, National Insurance, and pension contributions. Employers, on the other hand, will see an increase in total cost per NLW employee by approximately £212.06, driven largely by employer NI increases.
The NLW increase also narrows the gap between age-based pay rates, with a £1.40 rise for those 18-20 and a £1.15 increase for 16-17-year-olds and apprentices.
Reeves has also pledged £40 million towards a reformed Apprenticeship Levy, set to become a “Growth & Skills Levy” that permits more flexible learning and training options. This initiative broadens the scope of skills employers can support through levy funds, enhancing employee training investments and addressing evolving skill demands.
The Budget confirmed that Labour will not extend the existing Conservative-initiated income tax freeze. This change means that from 2028 onward, personal tax thresholds and allowances will adjust annually in line with inflation. For HR and payroll departments, this shift offers a more predictable basis for planning employee salaries and budgeting over the long term.
By keeping tax thresholds aligned with inflation, the adjustment should reduce “bracket creep,” where employees are pushed into higher tax brackets when their wage increases in line with the Cost of Living. For employers, inflation-linked brackets may help reduce the need for wage increases solely to offset tax bracket shifts, promoting better stability in payroll planning.
The corporation tax rate will remain capped at 25% during this Parliament, providing stability to business planning and budgeting efforts. Additionally, a permanent “full expensing” policy will allow companies to deduct 100% of the cost of qualifying capital investments, such as equipment and infrastructure, in the year of purchase. This measure is aimed at boosting productivity and promoting investment in long-term growth assets.
Notably, the government also introduced a “Corporate Tax Roadmap” for added stability. This roadmap outlines policies to create a consistent corporate tax environment, a feature particularly beneficial to large employers planning significant investments.
The budget has preserved the small business tax rate at 49.9p per pound of rateable value for 2025-26, while larger businesses will see an increase to 55.5p per pound. This differentiated approach aims to lessen the tax impact on small businesses while aligning larger business rates with inflation.
However, the discount for eligible Retail, Hospitality, and Leisure properties will reduce from 75% to 40%, with a maximum relief cap of £110,000. This change may increase costs for businesses in these sectors, influencing hiring and investment decisions.
The Carer’s Allowance earning limit will increase from £151 to £196, allowing carers to earn £45 more weekly without losing benefit eligibility. For employers with caregiving employees, this change may offer greater flexibility in adjusting wages or hours, empowering caregivers to maximise earnings. By facilitating these adjustments, employers can help improve job satisfaction and retention rates within this essential workforce.
A key question asked by many business leaders after the budget’s announcement was “what can we do to lessen the impact”?
There will be a clear focus for many businesses on offering salary sacrifice solutions in an attempt to reduce the overall National Insurance liability for employers. Through salary sacrifice, employees can agree to forgo part of their cash salary in exchange for non-cash benefits, which are typically tax-advantaged and can lower National Insurance contributions. Whilst this isn’t possible for employees earning at the National Living Wage, many employees (95% according to the Low Pay Commission) are earning above the National Living Wage rate, meaning potential savings can be achieved.
The only benefits you do not need to value and do not have to report to HMRC for a salary sacrifice arrangement are:
With a legal duty for employers to provide a workplace pension scheme, using payroll software that supports salary sacrifice pension contributions could create significant savings. With sophisticated payroll systems, employers can set up salary sacrifice pension deductions wherever possible. The software will automatically adjust contributions if a deduction would bring an employee’s pay below the NLW, converting to a net deduction to maintain compliance.
Phase 3 also recommends a thorough review of existing payroll software to ensure accurate setup and handling of all pay elements. Employers should confirm their payroll is updated to handle correct tax and National Insurance treatments, and to introduce safeguards for National Living Wage compliance, including adjustments for salary sacrifice. This approach protects employers from potential NLW breaches while optimising payroll management.
Although the budget presents challenges, strategic payroll and HR planning with Phase 3’s support can mitigate these impacts, promoting stability for both the business and workforce.
James is our Chief Operating Officer, leading the service delivery and operations for Phase 3.
