Pay planning after the Autumn Budget: Thinking differently about reward
One of the key consequences of the 2025 Autumn Budget is the impact it is likely to have on how small and medium-sized businesses approach pay.
With inflation still tracking higher than in previous years, there is increasing pressure on employers to pay more.
While attention has understandably centred on many of the headline tax measures, the combination of frozen personal tax thresholds and their relationship to fiscal drag, as well as changes to how pension contributions are treated, will undoubtedly influence employers’ pay decisions for years to come.
For employers, the challenge is simple to explain but harder to manage. Every pound you spend on salary now produces less real benefit for your workforce and a potentially bigger National Insurance bill for you.
Why take-home pay is shrinking even when salaries rise
Employees will feel the effects first. Because thresholds for Income Tax and National Insurance are fixed until 2031, more of any pay rise ends up taxed at higher marginal rates.
That means even a fair and reasonable increase can look good on paper but disappoint when it hits their bank accounts.
This is especially true for people who find more of their income moving into higher tax bands. Under the current rates of Income Tax, for every extra pound earned, higher rate taxpayers see just a little over half in their take-home pay.
Someone caught in the taper between £100,000 and £125,000 keeps even less. The practical effect is that employees feel as if they are standing still, even as their employer fights hard to increase their pay in line with inflation.
As many have pointed out, the Income Tax freeze is a tax rise in anything but name and for business owners this presents an immediate difficulty.
How do you maintain motivation and fairness when the tax system erodes the value of the salary you offer?
Pension reform complexity
The upcoming change to pension salary sacrifice rules, due in April 2029, only makes the setting of pay more challenging.
At present, salary sacrifice remains one of the most efficient ways to help employees boost their retirement savings. That changes once the new £2,000 NIC relief cap is introduced.
Above that level, any amount exchanged for pension contributions will attract NICs in the normal way.
Employers will face a 15 per cent charge and employees between two and eight per cent, depending on income.
Although this may sound technical, the impact is very real. It reduces the effectiveness of one of the few remaining tax-efficient tools employers have to help staff grow their pension pots without significantly increasing cash pay.
Many employers currently share some of their NIC saving with staff. Once the cap comes in, that saving shrinks, reducing how far employer contributions can stretch.
Paying directors post Autumn Budget
If setting pay for your employees wasn’t hard enough, you will need to put greater consideration into what you pay yourself and other directors.
The two per cent increase to the ordinary and higher rate of dividend tax from April 2026 means that withdrawing profits from your business may now be less efficient than taking a larger salary or using salary sacrifice via a pension scheme.
It is important that you consider how you are paid to ensure that it doesn’t place any additional costs on your business.
A new approach to reward is needed
The issue is not simply that tax is rising. It is that the overall system now makes it far harder for businesses to deliver visible value through pay alone.
These dynamics risk creating frustration or disengagement among staff, even when employers are acting reasonably.
SMEs will increasingly need other tools to offer competitive and compelling packages. These might include:
- A greater focus on performance-related pay such as commissions and bonuses
- Share schemes, such as EMI or CSOP, which remain attractive and untouched by the Budget
- Broader benefits around wellbeing and work-life balance
Planning your employees’ pay
The Autumn Budget did not remove salary as a lever for reward, but what it did do is change the economics behind it.
For SMEs already facing rising costs, the difficulty is deciding how to reward people fairly when the tax system takes a larger share than ever.
If you would like support reviewing your own pay and reward strategy in light of the recent Budget changes, now is the ideal time to start the conversation. Please get in touch with our experienced team for advice.
