Changes to National Minimum Wage: What you need to know

Following the October 2024 Budget announcements, significant changes to the National Minimum Wage (NMW) and National Living Wage (NLW) are due to take effect from April 2025.

While these adjustments represent positive news for workers, they also present financial considerations for employers who must navigate increased wage costs – on top of changes to Employer NICs (see last week’s Tax Tuesday) – while maintaining operational efficiency.

What is the National Minimum/Living Wage?

From 1 April 2025, employers must pay employees the revised minimum hourly rates based on their age or apprenticeship status. The new rates are part of Labour’s broader ambition to align all adults under a unified minimum wage.

For now, the changes include the following key updates:

• National Living Wage (NLW): For workers aged 21 and over, the NLW sets the baseline hourly pay.
• National Minimum Wage (NMW): For workers under 21 or apprentices, the NMW applies.

The increases are significant, at 16.3% for 18-20 year olds, and 18.0% for 16-17 year olds and apprentices.

Implications for Employers

While the wage increases are a win for employees, they present new challenges for employers – especially in industries with a significant proportion of younger staff or apprentices.

• Employers with a young workforce will face a notable rise in payroll expenses. For example, businesses in retail, hospitality, and other sectors with a higher concentration of workers under 21 will feel the effects most acutely. They must evaluate whether wage increases will impact hiring, retaining, or offering pay progression to existing staff.
• Employers offering apprenticeships must consider the rising costs of apprentice wages. While the increased rates aim to make apprenticeships more attractive, they may require budget adjustments to sustain training programs.

Working example

To illustrate the financial impact, here’s a sample calculation based on a business employing younger workers. In this case, we consider a hospitality business that employs 10 workers aged 18–20, each working 30 hours per week at the current minimum hourly rate of £8.60.

Current wage costs:

• Hourly rate: £8.60
• Weekly wage per employee: £8.60 × 30 hours = £258
• Annual wage per employee: £258 × 52 weeks = £13,416
• Total annual cost for 10 employees: £13,416 × 10 = £134,160

Projected wage costs (16.3% increase):

• New hourly rate: £10.00
• Weekly wage per employee: £10.00 × 30 hours = £300
• Annual wage per employee: £300 × 52 weeks = £15,600
• Total annual cost for 10 employees: £15,600 × 10 = £156,000

In this example, the additional annual cost for the business to retain the existing 10 team members is £21,840.

For businesses with tight margins, these increases highlight the importance of proactive financial planning to ensure continued compliance while maintaining profitability.

How can employers prepare?

With these changes on the horizon, employers should take steps now to prepare for the impact:

• Reassess budgets: Incorporate the new wage rates into your 2025 financial forecasts to understand the implications for payroll costs. We’ll be looking at forecasting in more depth in this month’s Fintech Friday.
• Review workforce structures: Consider whether adjustments in staffing levels, scheduling, or operational efficiency could help manage costs while maintaining service levels.
• Enhance productivity: Explore ways to boost employee productivity to balance higher wages with increased output or efficiency.
• Engage employees: Open communication with staff about wage changes can foster goodwill and ensure employees understand the broader context of these adjustments.
• Seek expert advice: Consulting with your accountant or financial advisor can help you plan for wage increases and identify areas where cost-saving measures can offset the impact.

How can we help?

The upcoming changes to the NMW and NLW represent a pivotal moment for both employers and employees. While they underscore the government’s commitment to fair pay and wage parity, they also require careful planning from businesses to absorb higher costs without compromising operations or employee satisfaction.

If you are concerned about managing these increased costs or need guidance on how best to adjust your financial strategies, now is the time to seek professional advice. Working with your accountant can help you forecast the impact on your budget and identify potential savings.

Contact your relationship principal, email tax@haroldsharp.co.uk or call 0161 905 1616.