The minimum wage for over 21s, known officially as the National Living Wage (NLW), will rise by 6.7%, from £11.44 to £12.21 from April 2025. This is the minimum wage payable to employees, which has already received two consecutive years of double-digit increases.
At the same time, the Real Living Wage (RLW), a voluntary amount set by the Living Wage Foundation, increases to £12.60 in the UK and £13.85 in London, representing 5% and 5.3% increases respectively. Employers implement this new rate in the six months following the announcement, with the expectation that increases will be made by 1 May 2025 at the latest.
In the Autumn statement it was announced that Employer’s National Insurance is also set to rise from 13.8% to 15% in April 2025. Whichever rate employers commit to paying, the uplift in these rates alongside NI changes increase the staff pay bill for employers in 2025.
What does this mean for workers?
Indications before this announcement were that pay rises would be smaller in 2025 than in 2024. Research by Brightmine found the expected median pay award forecast for next 12 months is 3%, down from 4.7% in 2024 and 6% in 2023.
We would expect this to be further compounded by the NI rise if, as expected, that cost to business is passed onto employees in the form of lower pay awards in 2025.
How will it affect businesses?
Raising the ‘floor’ of base wages by 5 - 6.7% is likely to exceed the median pay award in 2025. This will likely result in wage compression, where the difference between pay at different grades is reduced.
FDs and HR face the key challenge of incorporating these increases without busting the budget, while preserving pay differentials at a ‘reasonable’ level for skilled staff or between managers and their teams.
While initial changes to pay structures – like removing grades or amending pay points – will go a certain way towards meeting the challenge, businesses are unlikely to settle on a more sustainable solution without fully reviewing their current pay structures. For employers undertaking a review, we would recommend three key considerations:
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Use Job Evaluation methodology to objectively compare the size of roles
The pay differential between a manager and their team will depend on the roles in question and should reflect the difference in the size of the roles. Using a robust Job Evaluation framework like Evaluate enables an organisation to objectively size roles based on a range of factors including:
- the expertise needed to perform the role
- the complexity of the role
- the impact the role has on overall organisational performance
Having this oversight gives clarity and context around the difference between a manager’s role and that of their team, enabling HR and business leaders to better understand and justify differences in pay.
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Review your Progression Mechanism
Understanding the impact of your current progression mechanic is crucial. Analysis of the distribution of pay awards, or increased movement, can help employers understand if this is causing further wage compression. Companies may need to look at whether changes are required to ensure compression issues are addressed.
One increasingly common focus for companies is skills-based or competence-based progression, enabling companies to differentiate roles based on the additional specific skills or levels of competence they require, compared with roles paid at entry level living wage rates.
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Use market data to understand typical differentials
Market data can also help understand what a typical pay differential between a manager and their team might look like. This broader industry insight is useful to guide decision-making around the difference a company wants to achieve. Depending on the difference between its current situation and the market, they can decide how achievable it might be to make changes in the short term, or whether increases need to be phased in over a period of time.
In going through this process and using market data, you can also review how individuals compare with the market. A small differential may be caused by a team member being paid high against the market, or by their manager being underpaid compared with other people in similar positions. This might be down to a number of reasons, including length of service, performance-based increases or legacy agreements, but market data can help bring clarity to what is ‘typical’.
Uplifts in living wage rates and national insurance contributions are likely to give employers less flexibility to ensure pay awards have a meaningful impact, and Innecto can support here with our pay review solution, Advance. Advance is a user-friendly online platform for managing the entire pay review process and allows HR to fully customise settings with their company’s pay profile and model pay scenarios. By doing this, they can maximise their available pay pot and deliver the outcome needed to retain key talent and maintain pay differentials.
