2025 Budget: What Employers Need to Know

The 2025 Autumn Budget brings several changes that will directly affect employers, payroll teams, and any accountant working with business owners. While Chancellor Reeves avoided immediate headline-grabbing increases to National Insurance Contributions (NICs), other measures will impact employment costs in the next few years. Here’s a breakdown of the key changes, what they mean in practice and how you as an accountant can guide your clients through the months ahead.

National Insurance Threshold Freeze

The employer NI threshold will be frozen for an additional three years until 2031. A freeze acts as a silent increase: as wages rise, more employees will fall into higher tax bands. There’s likely to be growing pressure around salary reviews and benefits.When combined with minimum wage increases and the £2,000 salary sacrifice pension cap, total employee costs could rise.

Next steps:

• Advise clients to plan ahead for staffing budgets (and payroll increases) beyond 2028 – consider salary, NICs, and pension together with retention needs.

Minimum Wage Increases

The National Living Wage for employees aged 21 and over will increase from £12.21 to £12.71 per hour from 1 April 2026. The National Minimum Wage for 18-20 year olds rises from £10.00 to £10.85, and rates for 16-17 year olds and apprentices increase from £7.55 to £8.00. For some businesses, the cumulative impact on payroll costs will be significant.

Next steps:

• Review client payrolls to identify affected employees and calculate the additional annual costs.
• Consider the knock-on effects for workers currently earning just above minimum wage rates, as pay structures may need rebalancing to maintain pay differentials.
• Identify clients at risk of non-compliance and prepare them early for rate changes.

Salary Sacrifice Pension Contribution Changes

From April 2029, salary-sacrificed pension contributions above £2,000 will incur employer and employee NI charges, removing a major tax efficiency for both employers and employees. This change fundamentally alters the cost-benefit calculation for salary sacrifice schemes, and employers with generous schemes as well as high earners will notice the biggest shift.

Next steps:

• Early planning will help clients make informed decisions about their pension strategies and communicate with their staff.
• Review clients’ current salary sacrifice arrangements and consider whether alternative pension contribution methods might become more attractive.

Dividend Tax Increases

From April 2026, dividend tax rates will increase by 2 percentage points across all bands. The basic rate rises from 8.75% to 10.75%, whilst the higher rate jumps from 33.75% to 35.75%. The additional rate remains unchanged at 39.35%. This change shifts cost-benefit calculations for business owners extracting profits through dividends rather than salary and many working shareholders in family businesses and smaller companies will feel the impact.

Next steps:

• Start conversations now about restructuring profit extraction to minimise the overall tax burden before April 2026.
• Consider advancing dividend payments to March 2026 (before the new rates take effect) where cash flow and company reserves permit.
• Model alternative extraction methods. Compare the post-April 2026 dividend route with salary increases, pension contributions, and other benefit-in-kind options.

Other Employment Tax Changes

• From April 2026, the income tax and NI exemption for employer-provided benefits extends to cover reimbursements for eye tests, home working equipment and flu vaccinations, giving employers new tax-efficient ways to support employee wellbeing without additional NI costs.
• There will be no late-submission penalties for MTD for ITSA quarterly updates in year one, giving small employers who are also sole traders some breathing room to adapt.
• The requirement to report benefits in kind (BIK) through real-time payroll software has been postponed from April 2026 to April 2027 because mandatory payrolling of benefits will require significant changes to payroll processes and software systems.
• Bringing employee car ownership schemes (ECOS) into scope of the BIK rules has been delayed to April 2030.
• From April 2026, employment agencies that supply workers to end clients (or end clients where there is no agency) will be jointly and severally responsible for the PAYE liabilities of the umbrella company.

HMRC is definitely focusing on closing compliance gaps in complex employment arrangements.

Your Clients’ FAQs

Q: When do the minimum wage increases take effect?

A: The new rates apply from 1 April 2026 – you and your clients have four months to prepare and budget.

Q: Do we need to raise pay for everyone or just minimum-wage staff?

A: There’s no legal requirement, but maintaining pay structures may be necessary for morale and retention.

Q: Will the salary sacrifice pension changes affect existing arrangements?

A: Yes, all salary sacrifice pension arrangements will be subject to the £2,000 annual threshold from April 2029, regardless of when they were established.

Q: Can employers start claiming the workplace benefits relief immediately?

A: The expanded relief for eye tests, home working equipment, and flu vaccinations begins from 6 April 2026.

Get ICPA’s 2025 Budget Summary

The 2025 Budget covers many more measures that will impact individuals, landlords, company directors, and small businesses. These changes require careful planning and clear communication with affected clients. The combined impact of wage increases and evolving compliance requirements makes proactive payroll management more critical than ever.

For a comprehensive analysis of all Budget measures affecting your clients, download ICPA’s 2025 Budget Summary. Our tax and payroll advice helplines also provide unlimited expert support to help navigate these changes and ensure your clients remain compliant.