Can you afford to give your people pay rises in 2025?

You want to reward your people fairly and keep them motivated into 2025. You also need to comply with the increased National Minimum Wage and bring any 18–20-year-olds up to the same level, but budgets are tight. So, what’s the right approach to pay rises in the year ahead? Let’s break it down.

Salary benchmarking: start with the data

Before you decide on any numbers, it’s essential to understand the market. Benchmarking is the process of comparing your pay rates with others in your industry and region. It’s not as intimidating as it sounds, and it can be incredibly insightful.

Start by asking:

What are competitors offering? A quick search or consultation with an HR expert can reveal average salary increases in your sector and ensure that you are still able to attract the best people to your business.
Are there trends in benefits? It’s not all about base salary—many companies are thinking of creative ways to enhance benefits to attract and retain talent.
What’s your local market like? Regional salary expectations can vary widely, so be sure to factor this in.

Benchmarking ensures you don’t underpay (and risk losing great people) or overpay (and strain your budget unnecessarily). It also provides context for your people so they can understand whether or not they are being paid fairly and what they could earn elsewhere – transparency works both ways!

What are your legal obligations?

From next April, anyone over 21 in your business must be paid the minimum wage, known officially as the National Living Wage, which will rise by 6.7%, from £11.44 to £12.21. For 18 to 20-year-olds, the minimum wage will rise from £8.60 to £10. The biggest pay hike will be for apprentices who will go from £6.40 to £7.55 per hour. For someone working 37.5 hours a week, their annual wage will go from £12,513 to £14,762

Regional Director Debra Lee recommends that business leaders start their pay review by looking at entry level roles and the people on National Minimum Wage. It is essential that you comply with the new pay regulations so it’s really important to understand the potential implications for your business.

Can you afford to give a pay rise?

This is the big question. Giving everyone a 5% pay rise might feel like the right thing to do, but it could be unsustainable and, depending on the results of your benchmarking exercise, may prove significantly adrift from market norms (the current expectation hovers around 4%, for example).

While overall your payroll may increase by 5%, people at different levels across the business will see different percentage increases. If you have people on NMW getting a 16% pay rise, you may only be able to afford a 2% increase for those in more senior positions. Debra advises that once you have ensured that your junior roles are meeting legal compensation levels, consider the gap between those roles and the next level up. You need to weigh up what needs to increase to legally comply along with the right thing to do by your whole team. Map out the increases for each level of your team.

You will need to think strategically about what you can afford and don’t forget to factor in the value of your entire remuneration and rewards / benefits package as well.

Assess your overall finances. What’s your projected revenue and profit for 2025? If there’s no room for pay rises now, can you make adjustments to free up funds from other areas, such as operational efficiencies, utility savings or production improvements?
Consider selective increases. Focus on rewarding high performers or those whose roles are critical to the business. But be aware of potentially negative ramifications and ensure your decisions are defensible and fair. (pressures on pay parity could make this problematic so you will need to have transparent KPIs and performance expectations defined for every role).

We would always recommend employers to review whether they can give a rise in line with the annual cost of living increase as a starting point, as those are the costs your people will need to be able to absorb.

Thinking creatively about total rewards

Salary and reward pie chart If you have to be tough on the percentage by which you increase salaries, then you can put things in place to numb the pain a bit. Pay isn’t the only way to show employees you value them, so if a big pay rise isn’t realistic, you can still deliver value in other ways. Employees often don’t understand what their total reward package amounts to and that it includes holiday and pension. The rewards can add up to 20-30% more than the actual salary, so show each individual a visual representation of their package For many people, benefits, flexibility, and perks can be just as important. Here are a few ideas:

Enhanced benefits. Can you offer extra holiday days, improved healthcare plans, salary sacrifice tax saving schemes or a better pension contribution? For example, this year at People Puzzles, we introduced an extra day’s holiday for birthdays, which has been a popular benefit with our team.
Flexible benefits. Ask your people which rewards they actually value. Different generations want different benefits. Younger workers may value flexibility and extra time off, while many of your older team may value a good healthcare package and pension contributions, though this will vary depending on circumstances so the ability to choose personalised benefits could be an attractive option.
Share schemes. Can you set up an employee share scheme? Not only does this reward your people, but it also gives them skin in the game, making them more engaged and boosting retention. There are processes which must be followed to make this a viable option but it could be worth considering, depending on your business.
Flexible working. The ability to work from home or adjust hours can be a huge perk for many employees. It can also include unpaid time off such as a sabbatical to allow you time off to travel; you may also find some people would be happy to work fewer hours which could alleviate pressure on budgets.
Professional development. Investing in training and career development is a win:win situation. It shows a long-term commitment to your team’s growth and your business benefits from the enhanced skills and learning. If you have in-house capability to deliver some of this you can also save on using external contractors in some instances – this is something we are often able to provide for clients, for example.
Bonus or commission. Devising a fair scheme that links performance to reward can encourage your team to be more productive and may avoid blanket pay increases which are harder to budget for – being linked to performance ensures affordability.
Employee discount schemes. There are many schemes that offer small savings at UK retailers, which over the course of a year add up to over £1,000 of tax free savings and help people stretch their pay packets each month.
Financial education in the workplace. Help your people get the most out of their hard earned income by running webinars to improve financial literacy, which can in itself be seen as a benefit but may also encourage uptake of some of the benefit and salary sacrifice schemes.

By thinking out of the box about what you offer, you can boost employee satisfaction without necessarily giving the biggest pay rise on the block.

Structure efficiently and plan for the future

Taking a strategic view of the future of your business and planning for the organisational structure you actually need (as opposed to the one you may have, or have inherited) is critical. Sometimes there are savings to be made by reimagining a business’ structure so everyone is in the right role, aligned behind the same goals. For example, one of our People Directors recently saved a client business over £300K simply by allocating the right resource to an operational role, putting focus on debt retrieval!

Also consider whether all roles need to be full time, or even employed/permanent. Yes, we are biased, but the take-up of outsourced and contracted workers, such as fractional executives, can be a real win:win for businesses concerned about the potential implication of employment costs.

Communicate openly

Whatever decision you make about pay rises, communication is key. If employees understand why you’ve made a certain choice and see the bigger picture, they’re far more likely to feel valued.

Be transparent about:

How the business is performing financially with the appropriate team members.
How you’ve benchmarked pay and benefits.
The additional steps you’re taking to support your team, beyond pay.
Acknowledge that you know times are hard for everyone and thank your team for their efforts this year.

Giving the right pay rise in 2025 isn’t just about following trends or appeasing your workforce—it’s about striking a balance between fairness, business sustainability, and employee satisfaction. It also involves a holistic view of your company’s financial position and the structure it needs for the future, alongside an openness to embrace new models of workforce structure. While there is no denying the potentially significant financial impact of the Budget’s changes, with clear benchmarking, creative thinking, and honest communication, you can navigate the challenge successfully and keep your team engaged for the long haul. And if you need some guidance and perspective in working it all out – help is at hand.

Here’s to a thriving 2025!