How the 2025 Minimum Wage Increase Will Affect Your Business

With the new financial year comes changes to employment laws, and one of the most impactful updates for businesses is the national minimum wage increase. Whether you’re an employer or an employee, understanding the current rate and the changes of minimum wage rates will affect your business operations, payroll, and overall workforce strategy is essential.

Understanding the Minimum Wage Increase

The National Minimum Wage (NMW) increase is a significant change that affects millions of workers in the UK. The NMW is the minimum hourly rate that employers must pay their employees, and it is set by the government. This increase is part of the government’s efforts to improve living standards and ensure that workers are paid a fair wage.

The NMW increase is based on the recommendations of the Low Pay Commission (LPC), an independent body that advises the government on minimum wage rates. The LPC considers various factors, including the cost of living, inflation, and the state of the economy, when making its recommendations.

This increase is expected to benefit over three million workers, particularly those in low-paid jobs. However, some employers have expressed concerns about the impact of the increase on their businesses, citing higher costs and potential job losses. Balancing these concerns with the need to provide fair wages is a challenge that businesses will need to navigate carefully.

Current Rates and Changes

The current National Minimum Wage (NMW) rates are as follows:

  • £7.50 for 18-20 year olds
  • £9.18 for 21-22 year olds
  • £9.50 for 23 year olds and over
  • £11.44 for the National Living Wage (NLW) for workers aged 21 and over

The new rates, which will come into effect on 1 April 2025, are as follows:

  • £8.20 for 18-20 year olds (an increase of 9.3%)
  • £9.50 for 21-22 year olds (an increase of 3.3%)
  • £10.20 for 23 year olds and over (an increase of 7.4%)
  • £12.21 for the National Living Wage (NLW) for workers aged 21 and over (an increase of 6.7%)

Additionally, the apprentice rate will increase to £6.40 for apprentices under 19 or in their first year of apprenticeship. These new rates reflect the government’s commitment to ensuring fair pay across different age groups and employment statuses.

Who Gets the Minimum Wage

The National Minimum Wage (NMW) applies to all workers who are at least school leaving age. This means that workers who are 16 or 17 years old and have left school are entitled to the NMW.

The NMW also applies to apprentices, who are entitled to the apprentice rate if they are under 19 or in their first year of apprenticeship. Apprentices who are 19 or over and have completed their first year of apprenticeship are entitled to the NMW for their age group.

Workers who are 21 or over are entitled to the National Living Wage (NLW), which is currently £11.44 per hour. These wage rates ensure that all workers, regardless of age or apprenticeship status, receive fair compensation for their work.

The Real Living Wage and London Living Wage

The Real Living Wage is an independently-calculated wage rate that is based on what people need to get by. It is calculated by the Living Wage Foundation, which takes into account the cost of living and the needs of workers and their families.

The Real Living Wage is currently £9.90 per hour outside of London and £11.05 per hour in London. The London Living Wage is a higher rate that is designed to reflect the higher cost of living in London.

The Real Living Wage and London Living Wage are not the same as the National Minimum Wage (NMW) or the National Living Wage (NLW), which are set by the government. However, many employers choose to pay their workers the Real Living Wage or London Living Wage as a way of demonstrating their commitment to fair pay and living standards. This commitment can enhance employee satisfaction and retention, contributing to a more motivated and stable workforce.

Minimum Wage Increases in April 2025

Governments periodically adjust the minimum wage to reflect economic conditions, inflation, and the cost of living. The increase aims to align minimum wages with economic factors such as inflation and to reach a target of at least two-thirds of median earnings over time. In 2024 a 6.7% increase in the national minimum wage was announced, bringing it to £12.21 per hour, effective from 1 April 2025. This significant rise aims to improve the standard of living for low-income workers, but it also presents various challenges and considerations for both businesses and employees across various industries.

How the Minimum Wage Increase Affects Employers

The increase in the minimum wage, coupled with the need to prepare for higher wages due to upcoming increases in the National Minimum Wage (NMW), will have several financial implications for businesses. Additionally, tax rises could further impact businesses, particularly in relation to minimum wage increases, potentially leading to job cuts, hindering investment, and affecting consumer prices.

Higher Payroll and Extra Costs

Employers must budget for increased wages, especially in sectors with a high proportion of minimum-wage employees, such as retail, hospitality, and manufacturing. The government’s annual adjustments to the National Minimum Wage and National Living Wage rates mean that employers will face higher wage and national costs, which in turn may impact profit margins, especially for SMEs.

Adjustments to Pay Structures

A rise in the minimum wage can create pay compression, where lower-paid employees earn close to or as much as more experienced staff. Businesses may need to restructure salaries to maintain fair pay scales due to entry-level wages rising. Therefore, companies may face pressure from other staff to adjust salaries across the board to maintain wage hierarchies and employee satisfaction.

Price Adjustments

To offset increased expenses, some businesses might raise prices for goods and services, potentially affecting competitiveness. As companies increase wages, other extra costs as a result will have to increase, causing prices of goods and services to rise.

How Employees Benefit from the Minimum Wage Increase

Employees earning the minimum wage will benefit from increased earnings, supposedly leading to improved living standards. The Resolution Foundation provides insights on the implications of wage hikes relative to the cost of living and other economic factors.

Improved Earnings and Living Standards

A higher minimum wage means better financial stability for workers, helping them keep up with rising living costs.

Increased Job Satisfaction and Retention

Fair pay contributes to higher employee morale and reduces turnover, benefiting both workers and businesses in the long run.

More Opportunities for Career Growth

With businesses adjusting pay structures, employees may see more opportunities for promotions and professional development.

 

Despite employees receiving higher pay, it’s crucial for employees to remain compliant and meet legal requirements with this increase. Employers must ensure they comply with the new wage laws to avoid penalties and legal disputes. As an employer you need to implement the new wage rates accurately from 2025. Around 371,000 workers in the UK were paid less than the minimum wage last April, often due to inadvertent mistakes by employers. With the upcoming increase, the stakes are even higher, and enforcement is intensifying so make sure you are aware of these changes, identify and address any discrepancies promptly.

Considerations for Employers

Here’s a simple checklist to navigate the upcoming changes effectively, employers should:

  • Review Pay Structures: Assess and adjust existing wage structures to ensure compliance and maintain internal equity.
  • Train HR and Payroll Staff: Ensure that those responsible for processing wages are updated on the new rates and understand the legal requirements.
  • Communicate with Employees: Clearly inform staff about the changes and how they will be implemented to maintain transparency and trust.
  • Evaluate Overall Compensation: Consider how the increase affects benefits, bonuses, and other forms of compensation to ensure a balanced approach.

Given the complex rules around the national minimum wage, employers should be vigilant to avoid inadvertent mistakes that could lead to significant consequences, including financial penalties and reputational damage.

Prepare for the Changes Today

Activ People HR can support your business through these changes, ensuring a smooth transition while keeping your workforce engaged and satisfied. Using Activ People HR employers can remain compliant by simplifying HR admin and processes. track compliance and manage payroll adjustments efficiently by:

  • Track employee wages and ensure compliance with updated pay rates.
  • Manage workforce planning and optimise staffing costs.
  • Maintain employee records and pay structures efficiently.

The 2025 increase in the minimum wage represents a positive step towards improving employee welfare but requires careful planning and execution by businesses. Both employers and employees must stay informed and proactive to ensure a smooth transition and compliance with the new wage standards. Want to learn more on how Activ People HR can support your business? Contact us today for a demo and see how our HR software can help you manage the upcoming wage changes with ease.