Strategies to mitigate rising employment costs
Employment costs continue to rise across all sectors, driven by increases in statutory wage rates, frozen tax thresholds, and ongoing changes to the UK employment tax landscape. However, with proactive planning, many employers can mitigate, control or even offset these increases.
We outline the practical steps businesses can take now to strengthen financial resilience and maintain compliance.
1. Review pay structures and reassess salary sacrifice arrangements
Pension salary sacrifice remains one of the most effective cost-saving opportunities available to employers. However, from 6 April 2029, employer and employee NICs will apply to salary-sacrificed pension contributions above £2,000 per year, reducing the longstanding efficiency for higher earners.
Recommended actions for employers
- Analyse how many employees contribute above the new threshold.
- Implement a compliant pension salary exchange scheme, if one is not already in place.
- Model future NIC exposure to understand the potential impact on budgets.
- Maximise available salary sacrifice benefits during the remaining three years before the change.
- Consider alternative reward structures for senior employees, such as employer‑only pension contributions or targeted allowances.
Taking action early ensures full utilisation of existing reliefs and avoids unwelcome cost increases as we approach 2029.
2. Prepare for rising wages and the impact of frozen thresholds
From 1 April 2026, National Minimum and Living Wage rates will increase substantially. Combined with frozen income tax thresholds (now set until 2031), more employees will move into higher tax bands, increasing employer NICs and overall employment costs.
Recommended actions for employers
- Refresh workforce budgets to factor in wage increases, NIC changes and statutory pension uplifts.
- Reassess pay bands to avoid wage compression between junior and mid‑tier roles.
- Automate payroll processes to reduce administration, improve accuracy and support compliance.
- Consider voluntarily payrolling benefits ahead of the mandatory 2027 requirement, reducing pressure on future yearend cycles (you need to register with HMRC by 5 April 2026).
These steps help organisations manage cost pressures while maintaining a compliant and fair reward structure.
3. Strengthen compliance to avoid unnecessary costs
HMRC penalties regularly arise from avoidable errors or poor documentation. Key processes –off-payroll worker procedures, PBIK registration, P11Ds, PSAs and Class 1A NIC – remain under scrutiny, and employers should tighten their compliance frameworks accordingly.
Recommended actions for employers
- Undertake an annual PAYE health check to identify potential risks early, including due diligence on your resource supply chain
- Ensure benefit valuations (company cars, expenses, flexible benefits) are accurate and consistently applied.
- Streamline year‑end reporting by payrolling benefits where viable.
- Improve data flow between HR, payroll and finance teams to minimise duplication and error.
Robust governance not only reduces risk; it also provides clearer insight into true employment costs to support informed decision‑making.
4. Manage global mobility and remote working risk
Cross-border working patterns have changed permanently, and HMRC is scrutinising Short-Term Business Visitor (STBV) arrangements, overseas-based remote workers and modified/shadow payrolls more closely.‑
Recommended actions for employers
- Implement accurate tracking of global workdays (days an employee physically works outside their home country) using integrated mobility tools.
- Review overseas travel and STBV agreements annually to ensure continued compliance.
- Check that shadow payrolls (parallel payroll run for tax reporting only) are operating correctly in both home and host jurisdictions.
- Assess whether remote workers overseas could create Permanent Establishment (PE) risk under the OECD guidelines.
- Coordinate home/host tax positions early to avoid double taxation.
Clear documentation, strong processes and early assessment help avoid unexpected liabilities - and ensure mobility arrangements support, rather than hinder, strategic growth.
5. Reassess benefits and workforce strategy
In a higher‑cost environment, employers must ensure that benefits, workforce structures and compliance processes are delivering genuine value.
Recommended actions for employers
- Review your employee benefits package, survey your staff for their input, clarify your benefits budget and adapt accordingly. Take professional advice on this.
- Take time to understand the tax situation of your workforce and understand what you can do to support your employees within the business.
- Review your workplace pension scheme. It is your main employee benefit and understanding the performance of the pension and the governance of the scheme are key.
- Shift towards high‑value, low‑cost benefits such as wellbeing resources and employee discounts.
- Refresh off‑payroll (IR35) processes to avoid unexpected tax and NIC liabilities.
- Enhance employee communications to reduce administrative burden and improve engagement.
A clear, modernised benefits strategy helps improve retention and ensures compliance with HMRC expectations.
We’re here to help
Rising employment costs are a challenge for every organisation, but with proactive planning, tax‑efficient structuring and disciplined financial governance, employers can protect their margins and remain agile.
Whether you are reviewing salary sacrifice arrangements, strengthening global mobility processes or improving cashflow management, early action is essential.
If you have any questions or would like advice on mitigating rising employment costs, get in touch with a member of our specialist team or speak to your usual local Azets adviser.