The new £12.21 minimum wage – what will the impact be on your business payroll?
Does your business employ a significant number of lower-paid staff? If so, this blog is especially for you. From April 2025, the National Living Wage will rise to £12.21 per hour for workers aged 21 and over. This will have a big impact on businesses like yours across the UK.
The news isn’t all bad. You can ease the impact by taking a few key steps. As ever, planning is at the heart of what you need to do. You’ll need to review your payroll budget, check compliance, and plan for the wider impact on your workforce. Wage rises may also affect pension contributions, National Insurance, and salary expectations across your team.
Let’s take a closer look.
The National Minimum Wage - What’s changing?
From April 2025, the minimum wage will rise to £12.21 per hour for workers aged 21 and over. This is all part of the government's plan to increase wages in line with inflation and the cost of living.
Here’s how the new rates compare –
21 and over – £12.21 (previously £10.42 for 23+ and £10.18 for 21-22)
18 to 20 – £8.60 (previously £7.49)
16 to 17 and apprentices – £6.40 (previously £5.28)
These changes mean many businesses will face higher payroll costs. You may also need to adjust wages for employees earning just above the minimum to maintain pay differences across roles.
How will this affect your payroll costs?
Of course, the rise in the minimum wage means higher payroll costs. You’ll need to budget for these increases to stay compliant.
Beyond the basic pay rise, you will also need to account for –
National Insurance contributions – Higher wages mean higher employer National Insurance costs. And, as has been widely discussed, these are also rising – by an extra 1.2%.
Pension contributions – If employees earn above the pension threshold, your contributions may increase.
Wage compression – Staff earning just above the minimum wage may expect a pay rise to keep pay gaps fair.
Overtime and holiday pay – Higher hourly rates will push up overtime costs and statutory holiday pay.
There’s no doubt these costs could add up quickly. Planning now will help you manage payroll without putting pressure on your cash flow.
Managing the impact of the new minimum wage
Rising payroll costs will probably affect your business, but there are ways to manage the impact without cutting staff or reducing hours. It’s all about planning ahead. That will give you the best chance of keeping your business running smoothly while meeting legal requirements.
Here are some options to think about –
Review your budget – Look at payroll costs and adjust forecasts to reflect the new wage rates.
Improve efficiency – Streamline processes, reduce waste, and make better use of technology to cut costs.
Consider pricing adjustments – If your margins are tight, small price increases may help cover higher wages.
Upskill your team – Investing in staff training may boost productivity, helping you get more from your workforce.
Review staff hours – Adjust shift patterns to balance workload and wages more effectively.
By taking action now, you’ll avoid sudden financial strain and keep your business on track as wage costs rise.
Compliance and legal considerations
Rising wages mean you’ll need to check that your payroll is fully updated and compliant. Failing to pay staff correctly could lead to fines, legal action, and reputational damage.
Here’s how to stay on the right side of the law –
Update payroll systems – Make sure your software reflects the new rates from April 2025.
Check employee contracts – Review pay structures to ensure all staff are earning at least the new minimum wage.
Monitor payroll deductions – Ensure any deductions, such as uniform costs or salary sacrifice schemes, don’t push wages below the legal minimum.
Stay informed – Keep up with government guidance to avoid missing any further updates.
Prepare for audits – HMRC carries out regular checks, so keeping accurate records will help you stay compliant.
Long-term business impact of the new minimum wage
The increase in the minimum wage will affect businesses beyond short-term payroll costs. While some will face challenges, others may see long-term benefits.
Potential challenges
Higher operating costs – If your business operates with tight margins, you may struggle to absorb wage increases.
Pressure on wage structures – Employees earning just above the minimum may expect a pay rise to maintain fair pay gaps.
Pricing adjustments – You may need to raise prices, which could affect competitiveness.
Potential benefits
Better staff retention – Higher wages may reduce turnover, cutting recruitment and training costs.
Improved productivity – Fair pay often leads to a more motivated workforce.
Stronger employer reputation – Paying fair wages can boost your brand and help attract skilled employees.
How you respond will shape the long-term impact on your business. Planning now will help you stay competitive while keeping employees engaged and motivated.
Seek out expert payroll support
The new £12.21 minimum wage will bring higher payroll costs, but with the right planning, you’ll manage the impact and keep your business running smoothly. Reviewing budgets, improving efficiency, and staying compliant will help you adjust without unnecessary strain.
Now’s the time to prepare. Who better to talk to about the challenges ahead than your tax and payroll specialists?
Contact us today – we’re always here to help.