The first Labour Budget: what does it mean for employers?

The government is raising taxes by £40 billion, and over half of this will come from employers via an increase in employer NI which will come into effect from the new tax year. 

We take a look at the main issues employers need to factor into their plans, as well as some incentives that may increase the numbers of people available to work.  

Increase in employer NI  

The national insurance (NI) rate paid by employers will rise by 1.2% from 13.8% to 15% by April 2025. Additionally, the threshold at which employers start paying NI on a worker’s earnings will be reduced from £9,100 a year to £5,000.

Estimates say that this will cost employers around £900 per employee (based on median average earnings). Chancellor Reeves acknowledged the challenging nature of this decision and recognised that ‘there will be consequences’ to workers who are likely to get smaller pay rises going forward.

To support smaller businesses, the employment allowance will be raised from £5,000 to £10,500. This change means that over 800,000 employers will not pay any NI next year, while over one million will pay the same or less than they did previously.

Increase in National Minimum Wage

The Chancellor has accepted the recommendations of the Low Pay Commission and announced substantial increases in the rates of the National Living and Minimum Wage which will directly impact over three million UK workers. For the first time, these rates take into consideration the cost of living.

From April 2025 the National Living Wage (payable to workers aged 21 and above) will go up by 6.7% from £11.44 to £12.21. This is worth an extra £1,400 per year for full-time workers. 

Rates for the hourly National Minimum Wage rates will increase:

• By 16.3% for 18 to 20 year-olds - from for from 8.60 to £10.00 
• By 18.00% for apprentices - from £6.40 to £7.55

The accommodation offset will increase by 6.7% from £9.99 to £10.66 per day.

The National Minimum Wage increase of £1.40 is the biggest on record. The government aims to align the National Minimum Wage and National Living Wage over time, creating a single adult wage rate. 

Employee incentives

There will be a package of reforms to the taxation of Employee Ownership Trusts and Employee Benefit Trusts.

Personal thresholds to rise

Thresholds were frozen in the Conservative budget of 2022. Over time as inflation raised wages, more people were lifted into paying higher rates of tax despite not earning more in real terms in a process known as fiscal drag.

Contrary to pre-budget predictions, the Chancellor has said that she will unfreeze these thresholds, but not until 2028/29 when they will be adjusted in line with inflation. Employees are still, therefore, likely to want pay increases to account for the fact that their pay packets don't meet all of their essential needs.

Clamping down on tax avoidance by umbrella companies

The government has announced new legislation to tackle non-compliance in the umbrella company market, set to take effect from April 2026. This legislation will transfer the responsibility for Pay As You Earn (PAYE) from umbrella companies to the recruitment agencies that supply workers to end user clients. If no recruitment agency is involved, the end user client will assume this responsibility. 

Draft legislation will be published as part of the Finance Bill 2024-25.

Boost for productivity and targeting the economically inactive

The government introduced the ‘Get Britain Working’ scheme aimed at increasing workforce participation. With a £240 million investment, 16 ‘trailblazer’ projects will be launched to support those who are economically inactive, including disabled and long-term sick individuals. These projects will offer work, health, and skills support at the local level.

Increase in Carers’ Allowance 

Reeves announced an increase in the amount carers can earn while receiving the £81.90 per week allowance. The new limit will be equivalent to 16 hours at the National Living Wage (NLW) per week, allowing carers to earn over £10,000 a year while still receiving the benefit. This is the largest increase since carers’ allowance was introduced in 1976.

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