Budget 2025: What employers need to know about the key employment related announcements

The Government published its full Budget documents on 26 November 2025.

This year’s Budget brings together a mix of new policy decisions and confirmations of existing commitments. The most significant new development is the announcement of a future cap on pension salary sacrifice relief from 2029. Alongside this, the Government has confirmed two measures that have already been shaping employer planning for several years: the continuation of frozen income tax thresholds and a further rise in the National Living Wage from April 2026.

Taken together, these measures create a tight cost environment for employers, particularly those balancing margin pressure with recruitment challenges and rising employee expectations. Below, we outline why each change matters, what it means in practice, and how it is likely to affect workforce planning in 2025 and beyond.

Frozen income tax thresholds extended

The decision to keep income tax thresholds frozen means more employees will be pushed into higher tax bands as their wages rise. This matters because even when employers offer inflationary pay increases, employees may still see limited improvements in net pay due to fiscal drag.

In practice, this is likely to create pressure during pay review cycles. For example, a medium sized professional services employer may find that employees receiving a standard 4%–5% pay increase move into the higher rate tax bracket, prompting more conversations about net pay and perceived fairness. Organisations may need to place greater emphasis on total reward communication, including benefits, wellbeing support and non-cash recognition.

Pension salary sacrifice relief to be capped from 2029

The Budget confirms that, from 2029, only the first £2,000 of salary sacrificed pension contributions will attract full tax and National Insurance relief. This is the most significant new development for employers. Salary sacrifice has historically been a highly efficient tool for pension saving; limiting the relief will reduce its effectiveness, especially for higher earners.

In practice, employers will need to review scheme design and model cost implications. A manufacturing employer offering 8%–10% matched contributions, for example, may find that both employee and employer NIC liabilities increase for individuals making higher level contributions. This is likely to require updates to internal documentation, pension communications and budgeting assumptions.

The impact is not only financial. Some employees may need guidance on how the cap affects long term pension planning. Early communication will be important to maintain engagement with workplace saving.

National Minimum Wage and National Living Wage increases from April 2026

The National Living Wage for those aged 21 and over will increase to £12.71 per hour from April 2026, with further rises for younger workers and apprentices. This continues the trend of above inflation statutory wage growth and is expected to place notable pressure on labour intensive sectors.

In practice, employers will need to incorporate the new rates into workforce budgets. A national retail employer, for example, may face a multi-million pound uplift in baseline wage costs, which could in turn require a review of staffing models, rota patterns and overtime arrangements. Smaller employers may face similar proportional cost increases, particularly where roles are clustered around the lower pay bands.

The likely impact is pay compression. Where the lowest pay bands rise, organisations often need to adjust supervisory or mid-tier salaries to maintain appropriate differentials. This can have broader implications for pay frameworks, progression routes and organisational design.

Measures unchanged in this Budget

The Budget introduces no new statutory employment rights or changes to employer National Insurance contributions. While this provides some regulatory stability, it does not reduce the combined cost pressures created by wage growth, tax threshold freezes, and the future pension salary sacrifice cap.

In practice, employers must still prepare for the ongoing financial implications of existing reforms. For example, a care provider or hospitality business may not face new compliance duties but will still need to navigate rising wage floors at a time when margins are already under strain.

The likely impact is continued scrutiny of staffing costs, benefit structures and recruitment strategies, particularly for employers operating in competitive labour markets.

What employers should do now: practical next steps

To prepare effectively for the combined impact of the Budget measures, employers should take the following steps:

• Run detailed payroll and cost modelling – Model the combined effect of NLW increases, frozen tax thresholds and the 2029 salary sacrifice cap across your full workforce. This should include net pay impact assessments so that you understand where employee concerns may arise.
• Review pay structures for compression risk – Identify roles that risk becoming compressed as statutory wage rates increase. Assess whether pay bands, progression routes or supervisory differentials require adjustment.
• Assess pension scheme design against the 2029 cap – Review which employee cohorts are likely to be affected by the £2,000 relief limit, and model the resulting employer NIC exposure. Consider whether scheme rules, contribution structures or benefit communications need updating.
• Strengthen employee communication plans – Prepare clear, accessible explanations of how the Budget affects take home pay, pensions and reward. This will help support trust and transparency at a time when employees may be more sensitive to pay related changes.

• Review staffing models and workforce planning assumptions – Where higher baseline wage costs will apply, explore efficiencies in scheduling, overtime usage and role design. Organisations with large hourly paid workforces should act early to avoid rushed adjustments in 2026.

• Prepare for compliance checks around wage increases – Ensure contracts, systems and rostering practices are updated well ahead of April 2026. Accurate record keeping and early audits will help minimise the risk of inadvertent non compliance.

Looking ahead

The Budget may not introduce new employment duties, but its financial implications for pay, pensions and workforce planning are significant. Taking a proactive approach now will help ensure compliance, protect employee confidence and give organisations the certainty they need to plan ahead.