The UK Budget 2025 contains several measures that will directly affect employers and their HR, reward and finance teams. While the Budget covers a wide range of policies, the proposals linked to pay, benefits, tax and workforce development will be of particular interest to HR leaders responsible for planning ahead.
Below is a clear summary of the key points and the practical actions HR teams may want to consider over the coming months.
- Income tax thresholds frozen until 2030/31
The Government confirmed that income tax thresholds will remain frozen until 2030/31. As wages rise, more employees will move into higher tax bands, creating ongoing fiscal drag. With the minimum wage increasing again, many higher earners – including senior managers and directors – will face increased tax bills despite pay growth.
For employers, this may influence reward, retention risk, and expectations around annual pay reviews. Some employees may feel the impact of higher taxation more sharply and seek compensation through salary discussions or enhanced benefits. HR and reward teams may need to budget more carefully while balancing fairness, cost pressures and internal pay structures.
- Minimum wage increases from April 2026
The Budget confirmed the following increases:
- National Living Wage (21+): up 4.1% to £12.71
- 18–20-year-olds: up 8.5% to £10.85
- 16–17-year-olds and apprentices: up 6% to £8
The UK will remain one of the highest minimum wage economies internationally. For larger organisations, these changes will have implications beyond frontline pay:
- Knock-on effects on pay compression
- Increased pressure to lift near-minimum rates to maintain pay differentials
- Additional costs across large, multi-site workforces
- Potential challenges recruiting younger workers if affordability becomes an issue
HR teams should start modelling the impact now across all grades, including supervisory roles likely to be squeezed by compression.
- Salary sacrifice changes from 2029
From April 2029, NICs relief on pension salary sacrifice will be capped at the first £2,000 per year. Contributions above that amount will attract employer and employee NICs.
This is a significant shift for larger employers offering enhanced pension arrangements or broader salary sacrifice benefits. It may:
- Reduce the appeal of certain benefits
- Prompt a rethink of total reward strategies
- Create challenges for higher earners who currently benefit the most
HR and reward functions will need time to redesign benefits packages, reconsider cost modelling and communicate changes effectively.
Other Budget measures relevant to employers
- Dividend tax: A 2 percentage point increase from April 2026 for directors paid partly through dividends.
- Apprenticeships: Training for apprentices under 25 will be fully funded for SMEs, but larger employers should focus on preparing for the Growth and Skills Levy.
- Growth and Skills Levy: From April 2026, levy funds can be used for shorter, modular or job-specific training, giving larger employers greater flexibility than the current Apprenticeship Levy.
- Business rates: Relief for high street sectors; increased rates for large distribution warehouses.
- Employee Ownership Trusts: CGT relief reduced from 100% to 50% for EOT sales.
- Welfare and sickness: The government intends to work with employers to better support staff who are unwell and tackle youth unemployment through a new “Youth Guarantee”.
5 things HR teams can do now
- Model wage increases and payroll impact
Assess minimum wage rises, pay compression risk and the future salary sacrifice cap.
- Review benefits and reward structures
Consider how the salary sacrifice changes may affect pensions, benefits uptake and the perceived value of reward packages.
- Prepare for higher tax pressures among senior staff
Review remuneration approaches for senior managers and directors who may now face increased personal tax burdens.
- Prepare for the Growth and Skills Levy
Identify priority skills areas and explore how new modular training could support workforce development.
- Keep employment law developments on the radar
Day one unfair dismissal rights and changes to zero-hour arrangements under the Employment Rights Bill will require updated contracts, policies and manager training.
