British employers have not made any changes in pay increases in response to rising costs and an impending hike in payroll taxes, bringing wage growth back in line with inflation for the first time since October 2023.
Data from human resources firm Brightmine shows that the median pay award remained at 3% for the three months to February 2025, marking the joint lowest rate of increase since December 2021.
This stabilisation suggests that businesses are exercising greater caution as they navigate economic uncertainties, a trend likely to be welcomed by the Bank of England (BoE) as it assesses inflationary pressures in the labour market.
Employers brace for tax rise
With payroll taxes set to increase in April, many British businesses are taking a conservative approach to wage growth.
Brightmine’s data indicates that a quarter of firms are planning to put hiring freezes or restructure their teams in response to the tax changes.
Some businesses are considering pay freezes and postponing salary increases to manage rising operational costs.
This shift reflects concerns about maintaining financial stability amid broader economic pressures, including higher social security contributions and minimum wage adjustments.
The cautious stance among employers is evident in the consistency of wage growth figures over recent months.
The median pay award of 3% in the three months to February remained unchanged from the previous two quarters.
This is in sharp contrast to the wage growth acceleration seen throughout 2023, when inflation-driven pay increases were more common.
As employers anticipate higher tax burdens, wage growth is unlikely to pick up significantly in the near term.
Minimum wage hike pressures firms
Along with the payroll tax increase, the UK’s minimum wage is set to rise by nearly 7% in April, putting further pressure on businesses.
Brightmine’s analysis suggests that nearly three-quarters of employers expect this change to narrow the gap between their lowest and highest-paid workers.
Companies with a significant proportion of lower-paid staff may need to adjust salary structures across the board to maintain differentiation between roles.
This could lead to cost-cutting measures elsewhere, including delayed pay rises for higher earners or reductions in discretionary bonuses.
The impact of the minimum wage hike will be particularly significant in sectors with large numbers of lower-paid employees, such as retail, hospitality, and care services.
Many businesses in these industries are already operating on tight margins and could face difficult decisions about pricing, staffing, and overall workforce management.
BoE watches wage trends
The BoE is closely monitoring wage growth as a key indicator of inflationary pressure in the economy.
The latest data suggesting a stagnation in pay increases supports expectations that inflationary risks from the labour market may be subsiding.
In January, the UK’s consumer price index (CPI) stood at 3%, matching the latest wage growth figures.
While the BoE is widely expected to keep interest rates on hold following its March meeting, a continued easing of wage pressures could strengthen the case for rate cuts later in the year.
Policymakers have been cautious about lowering borrowing costs too soon, fearing a resurgence of inflation.
However, if pay growth remains subdued and inflation continues its downward trend, the central bank may have more room to manoeuvre on monetary policy in the coming months.
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