The cumulative impact of employment tax and wage reform

Employment costs are rising as a result of tax reform, wage pressure and broader economic factors. For business owners and finance leaders, these changes will have a direct impact on payroll costs, reward structures and cashflow planning.

While each measure may appear manageable in isolation, the cumulative effect will place sustained pressure on employer budgets. Preparing will be key to maintaining control and avoiding reactive decision making.

National Living Wage and National Minimum Wage increases

Statutory pay rates will rise from April 2026, increasing baseline employment costs across most sectors.

1. The National Living Wage for workers aged 21 and over will increase to £12.71 per hour
2. Employees aged 18–20 will move to £10.85 per hour
3. Rates for under 18s and apprentices will rise to £8.00 per hour

These increases will not only affect those paid at or near minimum wage. They are also likely to drive pay compression, placing upward pressure on salary structures across organisations. Employers may need to review pay bands, differentials and progression frameworks to remain competitive and compliant.

Employer National Insurance Contributions

Following changes introduced from April 2025, Class 1 employer National Insurance Contributions (NICs) are charged at 15%. At the same time, the Secondary Threshold – the point at which employer NICs become payable – is set at £5,000 per year (£9,100 previously).

While not necessarily new changes, their full financial impact is now becoming more visible, particularly as wage levels rise and minimum pay thresholds increase. Employers are therefore paying NICs on a greater proportion of employee earnings, increasing the cost of every role across the workforce.

For labour intensive businesses or those with large workforces, this change represents a material increase in ongoing employment costs that will need to be reflected in budgets and pricing strategies.

Salary sacrifice and pension contribution changes

Looking further ahead, changes to the National Insurance treatment of pension salary sacrifice arrangements will impact pension planning. From April 2029, only the first £2,000 of employee pension contributions made via salary sacrifice each year will remain exempt from employer NICs.

This reduces the cost efficiency of salary sacrifice schemes and may prompt employers to review existing arrangements or consider alternative pension structures. While this change is several years away, early planning will help employers to:

• Manage future cost exposure
• Review the sustainability of existing salary sacrifice arrangements
• Explore alternative pension structures
• Plan employee communications

Income tax threshold freezes and pay progression

Income tax thresholds are currently frozen until 2031, meaning that as salaries rise through normal pay progression, more employees will move into higher tax bands without any real‑terms increase in purchasing power. This will continue to increase effective tax rates across the workforce over the coming years.

This can increase pressure on employers to deliver higher headline pay rises to maintain take home pay, further compounding payroll costs. It also reinforces the importance of reviewing total reward strategies, including benefits, pensions and non salary incentives.

Increased responsibilities and risks for employers engaging off‑payroll workers

From April 2026, businesses that engage workers paid through Umbrella Companies will be required to conduct robust due diligence on the supply chain to identify failures by the Umbrella Company to meet its obligations for tax and national insurance or fraudulent activities. Failure to identify can result in employers becoming 'joint and severally' liable.

This adds to the existing compliance burden associated with off‑payroll working rules, including IR35 and employment status considerations, and increases both the cost and risk of engaging off‑payroll workers.

What this means for employers

Taken together, these changes represent a sustained increase in the cost of employing people. Employers will need to balance compliance, competitiveness and affordability while continuing to attract and retain talent. Workforce modelling, cashflow forecasting and a review of reward and benefit structures will be critical over the next few years.

Acting early allows organisations to make informed, strategic decisions, strengthening their employee value proposition while managing rising employment costs in a controlled and sustainable way.

We’re here to help

Employment costs are rising, with further increases expected as policy and economic pressures continue. Early planning and clear visibility of workforce costs can help employers manage risk and protect margins.

If you would like advice on navigating rising employment costs, contact our specialist team via the form below.