Pay awards have stabilised at 3 percent ahead of the increase in employer national insurance in April, indicating a break with the higher payouts seen last year.
Awards remained at 3 percent for the third consecutive rolling quarter in February, which are the lowest pay awards since December 2021.
The data, from provider Brightmine, highlights that employers are maintaining cautious pay strategies as rises are now aligned with CPI inflation (3 percent in January 2025).
Brightmine said this ends a 15-month period, starting in October 2023, where pay awards consistently outpaced inflation.
Sheila Attwood, senior content manager, data and HR insights at Brightmine, said: “The stabilisation of pay awards reflects a more cautious approach from employers as they balance wage growth and rising costs.”
She added that while pay settlements are below 2024 levels, the fact they are in line with inflation may offer employers some relief from needing to keep up with higher inflationary increases.
The provider asked employers how they plan to manage the cost increases associated with higher NI rates and thresholds from April. The most common response was that employers plan to reduce pay award budgets. Researchers found that larger organisations are more likely to do this.
More than a fifth (44 percent) of employers with less than 250 employees said they plan to reduce pay awards. This rises to 60 percent for employers with 250 to 999 employees, and 66 percent for large organisations with 1,000 plus workers.
Employers are reducing pay award budgets by freezing pay (with the exception of legally required rises such as the minimum wage), delaying decisions and simply cutting budgets.
Around a quarter of organisations are bringing in recruitment freezes or restructuring teams to manage costs. A small proportion (4.3 percent) are introducing or expanding salary sacrifice schemes.
The government’s national living wage (NLW), for people aged 21 and over, and the national minimum wage (NMW) for people of at least school leaving age are rising on 1 April.
NLW will rise by 6.7 percent to £12.21 per hour, affecting nearly 60 percent of organisations, the provider said.
With a rise at the lower end of pay, 74 percent of affected employers said they expect to see a squeeze on pay differentials between job roles, seniority, experience and skills. A fifth (20 percent) reported that they expect to maintain the gaps.
However, 40 percent of affected businesses said they will take no action to address the squeeze.
Around a quarter plan to give additional pay rises to employees in the next pay levels up. Some employers told researchers they will apply the same increase to employees at the next one or two levels, with smaller increases for those at higher levels. This will still squeeze differentials at more senior levels but to a lesser extent.
A fifth of businesses said they would conduct a pay structure review to manage long-term pay equity.
Researchers said employers also mentioned upskilling staff for promotion, using bonuses for higher-paid employees, or enhancing benefits to retain talent as ways to manage squeezed pay differences.
Attwood said: “The increases in NI and the NMW are forcing businesses to make tough decisions on pay budgets. Many are prioritising financial stability over pay rises, and businesses must find ways to manage employee expectations when it comes to this year’s pay awards. Strategies such as enhancing benefits, benchmarking pay, or introducing inflation-linked pay adjustments can significantly help alleviate pressure on compensation decisions.”
