Employers are once again expected to shoulder a greater share of the cost impact of today's Budget, which arguably contradicts Labour's pledge to support businesses and grow the economy.
The impact of increases to the National Living and Minimum Wage
Central to this are the increases announced yesterday to the National Living and Minimum Wage rates, effective from 1 April 2026, which Rachel Reeves referred to as moving towards a "genuine living wage". The above-inflation increases of 6% and 8.5% to the respective rates for 16-17 and 18-20-year-olds will add considerable cost to employing younger workers from next year, with many businesses unable to pass on these costs to customers. Although the rate for 21-year-olds and over is increasing by a lower 4.1%, this will put pressure on employers to increase wages across the board to maintain the pay differential between starter roles and more experienced workers.
The Government insists the uplift to these rates is to support workers and to help with the cost of living; however, higher wages and salaries inevitably lead to an increase in tax and National Insurance Contribution revenues, and therefore, it could be argued that it is not the Government funding this support, but employers across the country.
The key question is how will the significant increases for the younger age groups impact the employment prospects of school, college and university leavers? Will these groups be too expensive to employ with little or no experience? And how will that impact workforces and job opportunities in the future?
The Fair Work Agency
Rachel Reeves mentioned the Fair Work Agency (FWA) during her speech, and which also features a number of times in the official documentation following the Budget. This is a new Government agency coming into force in April 2026 with the main aim of centralising compliance of all employment regulations.
The National Minimum Wage (NMW) will be within the FWA's remit, and it was announced that a number of measures will be introduced to further tackle non-compliance with the NMW rules, including closer working with trade unions and local business groups, more regular public naming, and exploring new powers for the FWA to target individuals in leadership roles. The extent of the latter measure is not yet known, but it is a concern for business owners whether this could cause them to be personally liable for NMW errors. What is certain is that NMW compliance is very much at the top of the Government's agenda for the foreseeable future.
It will be important for all businesses to check that processes and policies are fully compliant with NMW regulations before the Fair Work Agency starts its work in April, as we expect they will want to make an immediate impact on NMW errors, even those genuine mistakes that commonly occur.
Salary sacrifice, NIC and pension contributions
The other main announcement to affect employers is the capping of NIC relief on pension contributions via salary sacrifice arrangements to £2,000 per employee per tax year. Contributions above this figure, from April 2029, will be subject to both employee and employer NICs, costing the employer an additional 15% in NICs. These arrangements are common across all industry sectors, and this could be a significant cost burden to many employers who have been used to not paying NIC on these payments for many years (and decades in some cases).
Details of how these restrictions will work in practice will follow nearer the time, and we do not yet know how complex these will be, or whether there may be opportunities to structure pay and benefit packages differently to still benefit from the uncapped employer NIC exemption on non-salary sacrifice contributions. There is a mention in the official Budget documentation of potential anti-avoidance measures being introduced around this change, so employers should not get their hopes up too much at this stage. Of course, 2029 is still some way off, and there may even be a change of Government by then, which could decide to drop the idea as it doesn't go well with supporting self-funded pensions.
Tweaks to the Apprenticeship Scheme
As part of the Chancellor’s broader adjustments, a minor but notable change was also announced to the apprenticeship scheme. Currently, Small and Medium-Sized Enterprises (SMEs) benefit from co-investment relief for apprentices aged 18 to 21. This relief will now be extended to cover apprentices under the age of 25.
Importantly, there are no changes to the existing Employer National Insurance relief thresholds for apprentices under 25. Employers will continue to benefit from not paying National Insurance at a rate of 15% until the Secondary Upper Earnings Limit is reached.
However, businesses should remain mindful that National Minimum Wage rules also remain unchanged. While SMEs may save on training costs, apprentices must still be paid at the applicable National Minimum or Living Wage rates. From April 2026, the apprentice rate will rise to £8 per hour, a 6% increase. This rate applies to those aged up to 18 or in their first year of apprenticeship, and after the first year, apprentices must be paid the rate for their age in force at the time.
Other announcements
There were a few other titbits from Budget 2025 that may impact some employers: a consultation aimed at "simplifying and improving the administration" of the Construction Industry Scheme (this may be a good thing), slight adjustments to company van benefit in kind rates, and an easement on benefit in kind charges for plug in hybrid vehicles, plus several measures that are likely to apply across the board on tax compliance in terms of changes to behavioural tax penalties and tax errors in the Government's quest to lower the tax gap.
Finally, HMRC has published new interim guidance and legislation in respect of the move to mandatory payrolling of benefits in kind from April 2027, to coincide with the Budget announcements. This is not expected to answer all the outstanding questions and concerns many have on the move to mandatory payrolling, but it is at least a start in helping employers prepare for this major change to tax reporting in less than 18 months' time.
For advice and support about how any of the budget announcements will impact you or your business, please get in touch. Call 0808 144 5575 or email help@armstrongwatson.co.uk.
