Pay awards for 2025 are anticipated to be lower than initially expected for 60% of UK employers, according to new research from pay and reward specialists Paydata.

The findings come in the wake of Labour’s Autumn Budget announcement on 30 October 2024, which has prompted many employers to reassess their financial plans amidst rising costs.

The analysis, based on responses from 169 employers surveyed between 14 and 26 November 2024, reveals that while 38% of organisations do not expect to adjust their planned pay awards for 2025, a significant majority anticipate reductions. Paydata’s report highlights that the median pay award, excluding those impacted by the National Living Wage, is now forecast at 3.0%, down from the pre-budget expectation of 3.5%.

Tim Kellett, Managing Director at Paydata, noted the shift in organisational priorities, stating: “With two thirds of employers considering reducing their 2025 pay awards since the Autumn Budget, affordability has taken priority over other influences such as low inflation. Employers are exploring a range of strategies to address these challenges, including cuts to operational budgets, reductions in profit margins, and attrition-based headcount management.”

Approaches to Mitigate Budgetary Pressures

The Autumn Budget has triggered widespread deliberation among employers regarding how to manage increased costs while maintaining operations. According to Paydata’s findings:

  • Two-thirds of employers are contemplating reductions to their 2025 pay award budgets.
  • 35% are targeting operational budgets for cuts.
  • 34% plan to absorb additional costs through reduced profit margins.

Sector-specific strategies have also emerged. Construction and Electricity firms are more inclined to accept a reduction in profits, whereas Housing Associations are primarily focused on curbing both pay and operational budgets.

The survey also highlights that 27% of employers expect their pay budgets to decrease by 0.5% to 1.0%, while 15% predict a reduction of up to 0.5%. Meanwhile, 38% of respondents have retained their pre-budget pay award plans.

A Closer Look at Pay Award Expectations

The projected median pay award for 2025 now sits at 3.0%, with an interquartile range of 2.0% to 3.5%. These figures reflect a more cautious outlook among employers, driven by the economic and fiscal pressures following the Autumn Budget.

Paydata’s report underscores that this shift is not uniform across all sectors. For instance, industries such as Construction and Electricity are balancing cost pressures by absorbing them through reduced profits, while Housing Associations and others are prioritising internal cost-saving measures.

Tim Kellett elaborated on these trends, stating: “There is a clear divergence in how sectors are responding to the current market conditions. Employers are increasingly prioritising affordability while managing workforce expectations. We are committed to supporting businesses by monitoring these evolving trends as we enter 2025.”

Economic Context and Labour Market Implications

The adjustments to pay awards come amidst broader challenges in the UK labour market, including economic uncertainty and rising operational costs. While inflation has eased compared to previous years, the Autumn Budget’s increased tax burdens have prompted many organisations to reassess their financial commitments to both their workforce and operational strategies.

This recalibration of pay awards could have significant implications for the future of work, influencing employee retention, recruitment strategies, and broader labour market dynamics. As organisations navigate these challenges, maintaining a balance between cost management and workforce morale will be pivotal.