The cost of employing someone on an average UK salary is set to rise by 2%, following upcoming policy changes in National Insurance Contributions (NICs) and the National Living Wage (NLW). And this cost is expected to rise by up to 14% for some part-time workers, according to our recent analysis. When coupled with changes to employment law, this means organisations are now rapidly calculating the impact to their business.
National Living and Minimum Wages
National Insurance Contributions (NICs)
“Organisations have very quickly done the calculations and there are significant additional costs for them to consider,” says Anna Vishnyakov, Employment Partner, PwC UK. “Businesses are looking at where the biggest cost rises are and starting to plan how to mitigate these. What we are hearing now from clients is the need to make decisions for the longer-term.”
For many, the first area of focus is the next pay review. Planned pay budgets for 2025 have fallen by around 0.5% for many, settling at around a 3% increase in overall pay budgets planned in 2025. But reward planning goes beyond this. Vishnyakov explains: “the increase in wages at the lower end of the pay scale could put some employees in the same pay bracket as an employee in a role with greater responsibilities. This means the whole pay framework needs reassessing.”
Another lever businesses can look at is benefits. There’s an opportunity to reshape or remove some reward offerings that don’t offer value for money and are not valued by employees, while enhancing low cost but valued benefits like flexibility. Linked to this, employers can look further at salary sacrifice. With the increase in NICs, salary sacrifice could offer a way to reduce the cost impact of providing benefits, but should be balanced with the need to maintain NLW levels.
“In the short-to-medium term, business leaders can make smaller, tactical moves to counteract some costs. But looking ahead, they need to think bigger, about productivity and long-term investment decisions that have the potential to reshape the organisation and continue to be competitive. And recent changes could push organisations to invest more quickly in technology and generative AI, with the aim of boosting productivity to mitigate the costs of headcount,” says Alastair Woods, Workforce Transformation Partner, PwC UK. “We have heard from some clients that they are looking to go further than originally planned in technology investment as a consequence of the costs of labour.”
Many are looking to the adoption of technology, including AI and Cloud, which promise to boost productivity by automating tasks that currently require human input. We have already seen investment in customer facing activities, but many clients are moving quickly through back office areas such as finance, supply chain and operations, and increasingly in HR, to speed up processes and free-up time for employees to focus on areas that add more value.
And while AI has the potential to redefine how we work, leaders need to look carefully at how they can maximise it. Responsible use requires the right skills – and the right strategy – to steer decisions and actions.
As businesses look to accelerate their digital transformation, the skills required of the workforce are changing dramatically. There is clearly a role for upskilling in digital capability, and in areas such as data and analytics, but strengthening skills such as critical thinking, creativity and judgement will be crucial as new technology is rolled out.
Currently, a wide gap exists between the skills of the workforce today and what they’ll need to succeed in the future. If we couple that with the rising cost of labour and the productivity challenge faced by many organisations, it’s clear bridging this gap is not an easy fix.
Crucially, organisations will need to make decisions on whether future skills and jobs can be filled by training and redeployment or whether there is a need to look externally or from different sources. And this should all form part of a wider talent strategy, considering pay frameworks, location strategy and career pathways. While most organisations today have a pyramid model, this will likely change as jobs become more skilled. Companies will need to explore staffing models in ways they have not yet done.
“A strong logic for some of the recent policy changes is that we should be upgrading and creating new, higher paid jobs. That's good in concept, but there is a skills transition required which means understanding what you have, what you need and how to get there. In short, basic workforce planning.”
Alastair Woods
Workforce Transformation Partner, PwC UK
“For example, some businesses are looking to redeploy staff from back office roles, where there is greater opportunity for automation, to customer or field activity where they are seeing growth. This agility is going to be an important element of the future workforce landscape.” explains Woods. “We still generally think of employment as permanent but temporary workers and contractors are part of the solution.”
There’s a lot for businesses to digest, and more to come from this government. The Employment Rights Bill is another major consideration for business leaders when it comes to workforce planning.
The three things your business can do now?
Review rewards and benefits as part of your strategic planning for 2025, and look carefully at whether the employment offer meets the needs of today's workforce.
Consider where technology can accelerate transformation across key activities, and release capacity to focus on value-add areas.
Understand the current and future skills required for your organisation, and plan a workforce strategy that bridges those gaps.
Following proposals in the King’s speech in July, the Government is soon expected to release details of the Employment Rights Bill and the Equalities Bill. These changes are likely to be wide-ranging in nature, with many aspects for employers to consider now and in the future.
John Harding, head of employment tax at PwC UK, comments
Workforce Markets and Services Leader, PwC United Kingdom
Tel: +44 (0)7834 250359
Partner, Employment and Payroll Consulting, PwC United Kingdom
Tel: +44 (0)7808 030257
