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.
