How the Budget could derail your pay rise

Depending which side of the desk you sit on, last week’s Autumn Budget was day and night. Employees were gifted more protections via the Employment Rights Bill, while employers were gifted a number of new financial commitments to make.

The biggest headline was the increase in national minimum wage (NMW), which will go up by 6.7% next April. Workers who are paid by the hour will soon earn at least £12.21 per hour (£11.55 per hour today). Employer National Insurance contributions (NICs) have also risen.

All staff bonuses come with a trade-off, however. Startups data shows that many firms were planning to invest in pay rises and hiring next year. But with firms now facing a much higher staffing bill, wage growth for private-sector workers has been called into question.

Wage woes loom

In mid-October, Startups surveyed 531 UK businesses about their plans for the year ahead. The results paint a picture of optimism, with many planning to invest in scale-up.

Three in ten told us they expected to hire between one and five new employees to achieve their growth objectives in 2025. In a tight labour market, finding a qualified candidate has been one of the biggest challenges facing small businesses this year.

Retaining this talent in the face of spiralling real wages is a related challenge. Official figures from April 2021 indicate that switching careers is one of the quickest ways to increase salary, with movers growing their wages by 6.6%, on average, compared to those who stayed.

Pre-Budget, our survey shows that 33% of UK firms were planning to increase wages by an average of 5% in order to minimise the risk of staff turnover.

However, this planned payday jackpot for UK employees could be curtailed by the Autumn Statement. Research suggests bosses who had budgeted a 3% pay increase for staff would need to reduce these increases to offset the government’s latest measures.

The joys of spring?

Next April promises little for UK employers to look forward to. At the same time that the new minimum wage will come into force, staffing costs will also surge as a result of the changes to employer NICs — likely putting many at risk of closure.

Chancellor Rachel Reeves confirmed that employer NICs would increase by 1.2 percentage points to 15%. Simultaneously, the minimum threshold at which these apply will lower from £9,100 to a new threshold of £5,000, hitting those who hire part-time workers.

UK staff could feel the impact soon. According to the Office for Budget Responsibility (OBR), roughly 76% of the total cost of the NICs increase will be passed on to employees through lower real wages by the time 2027 comes around.

The watchdog also warned that the measure could lead to the equivalent of around 50,000 average-hour jobs being lost, as struggling businesses make layoffs in order to stay afloat.

Alex Till, Chair of The National Enterprise Network, said: “We must remember our micro and small businesses owners aren’t making huge profits like many corporations and they can’t just absorb these costs.

“Combined with the incoming legislation in the Making Work Pay deal, which will increase employment admin and costs yet further, it feels like yet another burden on the small companies who form the backbone of our economy, and will undoubtedly put many at risk.”

Will the Budget derail business growth?

Changes to employer NICs, combined with a new NMW, have put bosses who want to reward staff in a bind. While economic growth stays slow, the goalposts (in this case, staffing costs) are constantly moving, redefining a competitive salary each month.

In truth, the Budget has complicated these issues, not caused them. For months, firms have struggled to balance the rising cost of employment with the struggle to source qualified staff. And entrepreneurs have taken a ‘stiff upper lip’ approach to the challenge.

Also in our mid-October survey, 82% of UK businesses told us they were either optimistic or very optimistic about growth for their business. It remains to be seen if, and how, last week’s announcement has impacted that outlook.

Vishal Marria, CEO of software company Quantexa, acknowledged that the government needs to raise revenue from somewhere to fix the country’s spending ‘black hole’. But, he added, “we also need to ensure that we’re focused on innovation and growth.

“We need to allow UK businesses to scale if we’re to stay competitive both domestically and internationally. Many, like ourselves, will need to take the time to properly analyse today’s statement, to consider the right next steps for their business and its people.”