This Budget creates a perfect storm for employment costs. Extending income tax and national insurance threshold until 2030-31, and the introduction of a £2,000 cap on national insurance relief from 2029 for pension salary sacrifice means businesses face a compound burden that will reshape hiring and retention strategies.
What makes this particularly challenging is the timing. Employers are simultaneously preparing for the Employment Rights Bill changes and the Fair Work Agency’s launch in April 2026.
On Tax Measures
The real story here is fiscal drag (described as stealth tax). By extending the freeze on income tax thresholds until 2030–31 – three years beyond the original end date – millions of UK workers could face higher tax bills as wage growth pushes them into higher tax brackets.
Middle-income earners are likely to be most affected by the threshold freeze, as wage increases push them into higher tax brackets even though the rates themselves remain unchanged.
An employee earning £50,000 today could be paying 40% tax on a larger portion of their income by 2030 simply through wage increases.
Employer Response & Costs
With the income tax threshold freeze extended to 2030-31 and salary sacrifice arrangements being capped, employers face a difficult balancing act: how to retain middle earning talent when the cost of doing so has increased substantially.
Businesses can’t afford to wait – now is the time to model the impact on future payrolls. Those who plan ahead will be best placed to navigate the hurdles ahead. Expect a pivot to perks – pensions, flexible benefits, salary sacrifice – to keep talent without breaking budgets. But businesses should note that the new £2,000 NI-exempt cap on salary sacrifice pensions takes effect from April 2029.
On Payroll Planning
Middle earners will be caught in a double squeeze from April 2029. While frozen tax thresholds could reduce their take-home pay following pay increases, employers in four years time will face additional costs from the new £2,000 cap on salary sacrifice pension contributions. From April 2029, any pension contributions made through salary sacrifice above £2,000 will attract both employee and employer National Insurance. For an employee earning £60,000 annually who sacrifices £6,000 into their pension, employers will face an additional £900 in NICs on that excess. Across a workforce, that adds up quickly. The devil will be in the detail on this one.
On Compliance and Implementation
UK businesses are facing a challenging compliance landscape. Between now and April 2026, they need to review Budget measures, such as National Living Wage and National Minimum Wage, prepare for major Employment Rights Bill reforms, and ready themselves for the Fair Work Agency, all while managing day-to-day operations in a difficult economic environment.”
The reality is that some HR and payroll departments may face challenges such as limited time and/or a skills gap, which can impact their overall capacity to manage responsibilities effectively. Even well-intentioned employers can make mistakes in an environment this complex. We saw this recently when 500 UK employers were named for minimum wage failures totalling over £10 million in penalties. The message is clear: start planning now. Waiting until these measures come into effect to address these changes could cause a significant compliance risk.
