Understanding minimum wage increases

By alisonbarlow|Jan 31, 2025|12:25 pm GMT

An increase in minimum wage benefits workers, but its impact on businesses, employees, and the economy as a whole is more complicated. The yearly increase in the National Minimum Wage (NMW) – particularly in years where that jump is significant – creates additional business costs. In hospitality, where margins are already tight, these extra costs can be tricky to manage.

What is a minimum wage increase?

The National Minimum Wage is an hourly rate set by the government that stipulates the minimum amount a worker can be paid. NMW is typically adjusted annually in line with inflation and to reflect the cost of living.

When does the national minimum wage increase?

In the UK, new National Minimum Wage and National Living Wage (NLW) rates typically increase every year. Any updates are based on analysis by the Low Pay Commission, an independent body that advises the government. Its findings inform policies that support economic growth, protect employees from exploitation, and reduce poverty.

Does minimum wage increase every year?

The minimum wage has increased almost every year to reflect rising living costs. The percentage increase varies depending on the political agenda and economic conditions; 2024’s increase for over-21s of 9.8% was termed ‘record-breaking’ at the time, although it wasn’t far off 2023’s 9.7% increase. In April 2025, the over-21s rate will increase by 6.7%.

How often does the minimum wage increase?

Increases to the minimum wage are typically implemented every April. However, workers who move into other pay rates – either by ageing out of one classification or completing an apprenticeship – will see their pay increase as soon as they qualify for the new rate.

What happens to other wages when the minimum wage goes up?

When the minimum wage rises, businesses often need to adjust pay structures across all levels to ensure fairness and maintain an appropriate gap between senior staff and those on minimum wage:

• Salaried employees may see pay adjustments to prevent them from dipping below NMW and stop wage compression (where senior staff are paid similarly to junior staff).
• Mid-level and senior staff may also receive raises to maintain pay gaps and incentivise progression.
• Apprentices and younger workers will likely see accelerated pay increases over the next few years as the government seeks to minimise differences in pay based on age.

How do minimum wage increases affect businesses?

For employers, a rise in minimum wage means higher labour costs. This forces many to adopt new strategies to offset increased costs, such as reducing staff, cutting operating hours, or passing increased costs onto consumers.

Increased payroll costs

For employers, increasing the amount spent on wages puts pressure on profit margins, particularly in economic environments with depressed growth or limited demand.

Compliance challenges

The government’s NMW policy includes provisions for enforcing compliance with minimum wage guidelines. Every year, the government names and shames any companies that fail to pay their employees at least the minimum wage. These compliance breaches are costly for associated firms, which are subject to fines and reputational damage.

Workforce restructuring

For those who can’t afford to foot the bill for increased labour costs, minimum wage rises can mean reduced headcounts, operating hours, or restructuring teams to optimise labour efficiency.

Do all businesses have to pay minimum wage?

Minimum wage laws affect everyone, and all UK employers must comply with them. However, there are some exemptions for internships and people who are self-employed.

Do small businesses have to pay minimum wage?

The size of a business and its revenue or gross profit have no bearing on whether it has to pay minimum wage. Every employer in the UK must comply with NMW laws.

Does minimum wage increase cause inflation?

The relationship between wages going up and rising inflation is up for debate. Some economists argue that increased wages lead to higher consumer spending and drive growth as demand for goods and services increases. Others point out that higher labour costs generally have to be passed on to consumers, pushing the prices of goods and services higher and contributing to inflation.

When is the next increase in the minimum wage?

The latest update to the National Minimum Wage, announced in the Chancellor’s October Budget, will come into effect April 1, 2025. This includes several headline changes:

• Over-21s rate will increase to £12.21 per hour.
• 18-20-year-olds are getting a 16.3% increase to £10 per hour.
• Under-18s and apprentices will receive the biggest boost with an 18% increase, taking their pay rate to £7.55 per hour.

How Fourth can help with navigating minimum wage increases

Hospitality operators nationwide rely on Fourth’s HR and Payroll solution to streamline payroll processes and help them remain compliant. The platform includes:

• Updates every Spring to account for new legislation and regulatory changes.
• Integrations with scheduling solutions and time and attendance tracking to accurately log hours worked, preventing unpaid overtime from reducing actual hourly rates below the minimum wage threshold.
• Batch updates to quickly update records of affected employees when rates change.
• Automated custom reports so payroll teams can quickly audit employee records and determine who is impacted by any updates or changes.
• Rules and alerts automatically monitor employee eligibility and flag when individuals cross specified thresholds, such as ageing into the over-21s pay rate or completing an apprenticeship.