National Minimum Wage set to increase from April 2025

Following the Autumn Budget 2024 announcement, please read our latest article: National Minimum wage will increase from April 2025.

The National Minimum Wage (NMW) is set to increase from 1 April 2025 to between £11.82 to £12.39 an hour to reflect the cost of living under Labour's Plan to Make Work Pay.

As part of the new government's focus on workers' rights and pay, the Low Pay Commission (LPC) has been tasked to review its wage-setting process in order to ensure the NMW reflects the cost of living.

At the same time, the government also wants to make the rate of the NMW the same for all adults, regardless of age, by narrowing the gap between the National Minimum Wage, for 18–20-year-olds, and the National Living Wage.

However, the LPC will also continue to consider the impact of the rate on businesses, the labour market and the wider economy.

On 5 September 2024, the LPC confirmed that it has revised its estimate for the April 2025 National Living Wage rates will be in the range of £11.82 to £12.39

Wider agenda

The proposed change to the NMW is part of the government's wider agenda to reform workplace rights, as made clear in its pre-election manifesto. Some of its original proposals were watered down following concerns voiced by business groups.

On 24 May 2024, the Labour party renamed its New Deal for Working People to Make Work Pay in order to reassure businesses, and promised a full consultation before enacting legislation. 

It confirmed various policies, including removing current trade union legislation, a reduction in government outsourcing, and an end to hire and re-fire (unless bankruptcy would otherwise result), as well as “day one rights” on unfair dismissal, parental leave and sick pay (all subject to an employer's probationary periods and other possible exemptions yet to be made clear).

See our article: How the election results may affect employers

Current rate of NMW

The current hourly rate for the NMW depends on the worker's age and whether they are an apprentice. (Apprentices are entitled to the apprentice rate if they’re either: aged under 19, or aged 19 or over and in the first year of their apprenticeship.)

You have to be at least school leaving age to qualify for the NMW, or aged 21 or more to get the National Living Wage (NLW). The current rates since 1 April 2024 are:

The LPC will make its recommendations in October, ahead of the 30 October Budget, for the minimum wage rates to apply from 1 April 2025.

Preparing for the rise in the NMW

There was already a significant rise in the NMW in April 2024, impacting business overheads, and another significant rise may be on its way next April.

To prepare for the upcoming rise, employers can take several strategic steps. 

These include reviewing financial forecasts and budgets to accommodate higher wages, optimising workforce efficiency through training and performance management, and streamlining operations to reduce costs. 

Even staff paid above the minimum wage may expect a corresponding increase, but other employee incentives may be considered, such as share option schemes, equity incentives and non-cash benefits.

A proper review of salary structures and benefit packages can help to create a more rewarding and tax-efficient pay strategy for employees, particularly with the mandatory payrolling of benefits from April 2026.

Also, employers should bear in mind that with the NMW increase, any existing salary sacrifice schemes could be at risk if such schemes reduce salaries below the NMW rates.

In addition, adjusting pricing strategies and exploring alternative revenue streams can help offset increased expenses. Employers can also negotiate better terms with suppliers, review staffing levels, and enhance employee retention to minimise recruitment costs. 

Investigating any government incentives and engaging in long-term strategic planning can also help manage the impact of wage increases, whilst maintaining business profitability.

We can help with all these actions, so please come and talk to us.

What are the arguments for and against increasing the NMW?

Arguments For an Increase:

• Poverty Reduction: Proponents argue that raising the NMW can help reduce poverty and improve the living standards of low-wage workers. It ensures that workers earn a wage that is sufficient to cover basic living costs.
• Income Inequality: Supporters contend that an increase in the NMW can help reduce income inequality by narrowing the wage gap between low-wage and higher-wage workers.
• Boost to Consumer Spending: An increase in the NMW can potentially stimulate consumer spending as low-wage workers have more disposable income, which can benefit local businesses and the overall economy.
• Reduced Reliance on Social Welfare: Advocates argue that when workers earn a higher wage, they are less likely to rely on social welfare programs, reducing the burden on government resources.
• Improved Productivity and Employee Morale: Some argue that higher wages can lead to improved employee morale and productivity, which can benefit businesses in the long run.

Arguments Against an Increase:

• Impact on Small Businesses: Opponents claim that increasing the NMW may place a financial burden on small businesses, leading to potential job cuts, reduced hours, or even business closures.
• Inflationary Pressure: Critics argue that raising the NMW can lead to higher costs for businesses, which may be passed on to consumers in the form of increased prices, potentially contributing to inflation.
• Reduced Hiring: Some businesses may be hesitant to hire new employees or expand their workforce due to the increased labour costs associated with a higher NMW.
• Automation and Job Loss: Concerns are raised about the potential for businesses to automate tasks or invest in technology to replace human workers, particularly in industries with a high proportion of low-wage jobs.
• Regional Disparities: Critics note that a one-size-fits-all approach to the NMW may not take into account regional differences in the cost of living, potentially causing challenges for businesses in lower-cost areas.
• Compliance Costs: Some argue that the administrative and compliance costs associated with implementing a higher NMW may burden businesses, especially small and medium-sized enterprises.

In summary, the debate over increasing the NMW revolves around economic, social, and business considerations. Proponents emphasise the potential benefits for low-wage workers and the broader economy, while opponents express concerns about its impact on businesses, employment, and inflation.

The decision to raise the NMW involves finding a balance between all these arguments to promote economic growth while ensuring fair wages for workers. The LPC will have to weigh up all these factors, and we will have an answer on Budget day, 30 October.

NMW and tax thresholds (fiscal drag)

It is also worth noting that someone, say, aged 21 or older and working 35 hours a week on the current £11.44 NMW will have an annual salary of at least £20,820. But personal tax allowances remaining frozen at £12,570 until 2028, the effect of the new rates will increase the amount that is taxed on the worker (fiscal drag), so the full impact of the rise will be lost.

Enforcement

HMRC continues to enforce compliance on employers of the NMW. 

In addition to requiring the repayment of arrears and issuing penalties, HMRC can also publicly name employers who have failed to comply with paying the correct rate. 

Contact us  

We are here to support employers through any potential upcoming changes.  If you have any concerns or questions on the above, please contact our Employer Solutions team or your usual Bishop Fleming contact. 

[Gary Mackley-Smith]