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.

Governments periodically adjust the minimum wage to reflect economic conditions, inflation, and the cost of living. In 2024 a 6.7% increase in the national minimum wage was announced, bringing it to £12.21 per hour, effective from 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.

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%)

How the Minimum Wage Increase Affects Employers 

The increase in the minimum wage will have several financial implications for businesses: 

Higher Payroll Costs 
Employers must budget for increased wages, especially in sectors with a high proportion of minimum-wage employees, such as retail, hospitality, and manufacturing. With higher labour costs, employers will face higher wage bills 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 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. 

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 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.