Inflation and tax changes in late 2024 are causing UK employers to take a cautious approach to salary planning.
The latter part of 2024 was marked by significant economic
developments, including the introduction of the new Labour
government budget and the latest monetary policy report from the
Bank of England. These changes are shaping the landscape for UK
salary increases in 2025.
According to the
November 2024 monetary policy report, there was a rise in the
consumer price index (CPI) by 2.3% in the 12 months leading up to
October 2024, up from 1.7% in September. Services inflation also
remained stubbornly high, surpassing levels seen in the United
States and Euro areas, despite the Bank of England lowering
interest rates to 4.75%.
A persistently tight labour market may set off a wage-price
spiral, with rising wages leading to higher inflation and,
subsequently, more wage demands. Although services inflation is
slowly falling across regions, the moderation has primarily been
due to reductions in non-labour costs.
UK employers are forecasting an average salary increase of 3.9%
for 2025, according to WTW's
Salary Budget Planning Report, representing a decline from the
4.3% average increase observed in 2024. This trend aligns with
adjustments seen in other European markets, such as France, Spain
and Italy, which also have reduced their salary increase
projections by 0.4%.
A comparison of the December 2024 Salary Budget Report vs. the
December 2023 edition reveals a shift in organizational priorities
in the UK. Companies are increasingly concerned about internal
factors, with cost management and weaker financial results rising
in prominence – an increase from 21% to 35% and 26% to 31%,
respectively.
Changes to Employer National Insurance (NI) further highlights
these concerns. Starting in April 2025, the NI rate will increase
to 15% on salaries above £5,000 from the current 13.8% rate
on salaries above £9,100. This represents one of the most
significant tax-raising measures in recent history. The Bank of
England has suggested that the impact of this tax increase on
economic growth and inflationary pressures will depend on how
quickly and effectively it is absorbed into prices, wages,
employment or profit margins.
To gauge the corporate response to these tax changes, WTW
conducted a pulse survey that found that, of the companies that
have planned a response, 53% plan to reduce salary increases.
Twenty percent will scrutinize hiring more closely. Although it is
still too early to fully assess the effects of these inflation and
tax changes, pay is sticky and inflation accounts for past results,
leading to a lag before their interaction is understood. As such,
the responses received from the pulse survey indicate a cautious
approach by employers.
Given there is potential for further adjustments to planned 2025
salary increases it is worth considering this when managing your
own budgets for the year ahead and bear in mind that the figures
mentioned above from our latest Salary Budget Planning Report were
collected prior to the budget, and therefore, before the subsequent
increase in Employer National Insurance was confirmed.
Salary dynamics in 2025
As the UK navigates these economic challenges, the interplay among inflation, government policies and corporate strategies will be crucial in shaping salary dynamics for 2025. It won't be a surprise to see a revision in salary increases for 2025, similar to what we saw between 2023 and 2024. Insights from WTW's Salary Budget Planning Report offer valuable guidance for organizations preparing for 2025, underscoring the importance of strategic planning in uncertain times.
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