Pay stagnates as businesses brace for NI hikes

The HR data and insights provider’s February report reveals that pay settlements are now at their lowest level since December 2021, marking a significant shift from the more generous awards seen throughout 2024.

Pay Awards Now Aligned with Inflation

February’s data shows that median pay awards are now exactly in line with CPI inflation (3%), ending a 15-month period where wage growth consistently outpaced inflation rates.

"The stabilisation of pay awards reflects a more cautious approach from employers as they balance wage growth and rising costs," says Sheila Attwood, senior content manager for data and HR insights at Brightmine. "While pay settlements remain below last year’s levels, the alignment with inflation may provide some relief for businesses who previously needed to keep pace with higher-than-expected inflation."

National Insurance Driving Strategy Changes

With employer National Insurance contributions set to increase from April 2025, most organisations are adjusting their reward strategies in response. While one-third of businesses do not plan to cover the cost in their pay budgets, the majority are implementing various mitigation strategies.

The most common response is reducing pay award budgets, with larger organisations more likely to take this approach:

44.1% of small businesses (under 250 employees)
60% of medium-sized firms (250-999 employees)
65.9% of large organisations (1,000+ employees)

Many employers are implementing pay freezes except where legally required, cutting pay budgets by up to half, or delaying pay decisions to better assess financial impacts. Approximately 25% of organisations are introducing recruitment freezes or restructuring teams, while a smaller proportion (4.3%) are expanding salary sacrifice schemes to offset the NIC increases.

Managing National Living Wage Pressures

From April, the national living wage will rise by 6.7% to £12.21 per hour for workers aged 21 and over, affecting nearly 60% of organisations surveyed.

The primary challenge for reward professionals is maintaining pay differentials when lower-wage employees receive significantly larger percentage increases. Nearly three-quarters (74.3%) of affected organisations expect a squeeze on differentials, while only 20.1% anticipate maintaining them.

Responses to this challenge vary:

40% of affected organisations are taking no action
25% plan additional pay rises for employees at the next pay level(s)
20% are conducting comprehensive pay structure reviews

"The increases in National Insurance contributions and the national minimum wage are forcing businesses to make tough decisions on pay budgets," Attwood notes. "Many are prioritising financial stability over pay rises, and businesses must find ways to manage employee expectations. Strategies such as enhancing benefits, benchmarking pay, or introducing inflation-linked adjustments can significantly help alleviate pressure on compensation decisions."

Key Trends in Pay Awards

Brightmine’s analysis of 102 pay settlements affecting approximately 135,000 employees revealed several notable trends:

Pay awards are tightly clustered between 2.5% and 4%
More than a quarter (27.5%) of deals were exactly at 3%
Nearly three-quarters (72.9%) of current pay awards are lower than the previous year
Both private-sector services and manufacturing organisations recorded a median 3% pay award

As businesses navigate these challenging economic conditions, reward professionals will need to develop innovative strategies to balance financial constraints with employee expectations in what promises to be a complex year for compensation management.