NMW increases – why you might not feel the full effect

The government have accepted the low pay commissions recommendations to increase the national minimum wage rates on 1 April 2025 as follows:

Although the minimum wage rates have increased, not everyone will feel the full amount of the increase in their pocket. This is because the base line wage increases can be impacted by interactions with tax, National Insurance and other systems.

Although the interactions can be complex, we set some of the main ones out below, as understanding these interactions, will allow you to make informed decisions about your working, finances and future! 

Payroll deductions

Higher pay means you may have to pay more tax (usually 20% on anything over £242 a week in 2025/26), National Insurance (8% on anything over £242 a week in 2025/26) and more in pension contributions (up to 5% of your wages over £120 a week – although, in some cases, some of this may be made up from tax relief).

The increase may also mean that people in full time jobs will have an annual wage higher than the postgraduate student loan threshold of £21,000 per year, meaning deductions start. (£12.21 x 35 hrs x 52 weeks = £22,222.)

Salary sacrifice 

Provided they are implemented and operated correctly, salary sacrifice arrangements can be used to gain an advantage in a limited number of circumstances, such as pension saving, cycle to work or low CO2 emission cars.

The main advantage of salary sacrifice is that both employers and employees can save on National Insurance. However it is important that a salary sacrifice does not reduce an employee’s cash earnings below the appropriate minimum wage rate. An increased minimum wage rate therefore means that fewer people will be able to salary sacrifice post April 2025.

If this affects you, your employer may have to end the salary sacrifice arrangements you are in. If you use salary sacrifice for pension saving, you may have to make your pension contributions in the usual manner, as described in our website guidance.

There are unexpected consequences for employees slightly higher up the income ladder too, because an increase in the minimum wage rate may restrict how much salary you can sacrifice. An example can be found in our guidance. 

Universal credit 

The minimum wage increase may impact on the amount of in-work benefits you receive, as the higher your wages, the less you get in some benefits. For universal credit (UC) purposes, there is a 55% withdrawal rate on ‘net’ income over your work allowance (up to £684 per month in 2025/26). 

Jenny, 35, a lone parent with a baby, usually works around 90 hours a month in a pub, at the minimum wage. At £11.44 per hour there is no tax or NIC (earnings of £1,029.60 per month). Because she is on a low income, Jenny receives UC of £485.24 per UC assessment period.

In 2025/26, her hourly rate rises to £12.21 an hour, (£1,098.90 a month). Her award would be £472.60 per UC assessment period. At £12.21 an hour, there is also tax and NIC at 28% on her earnings above £1,048 per month (£14.25 per month). So, of her £69.30 increase in terms of gross earnings during her UC assessment period, the true value of the minimum wage increase to Jenny is only £42.40. She may need to check whether any passported benefits, like free school meals are affected by her increased wages. 

Carer’s Allowance

One of the conditions for carer’s allowance (£83.30 per week in 2025/26) is that you must not earn more than £196 a week (in 2025/26). Working 16 hours a week at £12.21 brings you very close to the threshold (£195.36). If you exceed it, the ‘cliff edge’ means you could lose all of your carer’s allowance. If you are claiming carer’s allowance and your earnings, after any allowable deductions, are close to the £196 a week limit, it is important to monitor them as against the threshold and avoid an overpayment situation. 

Other impacts of increases 

Increases to the national minimum wage need to be funded by employers and therefore raise the chance of some employers simply underpaying the minimum wage or turning to devices such as false self-employment.

Genuinely self-employed people are not entitled to the minimum wage. However making someone falsely self-employed to avoid the minimum wage isn’t the same as them being genuinely self-employed. If you are worried about how your employer is dealing with the NMW, you could phone ACAS for advice in the first instance.

   It is important you do not just accept false self-employment – as in addition to the issues around minimum wage, it means you probably won’t have the certainty of having your taxes dealt with under PAYE and will probably be denied employment rights, like holiday pay. 

A note for the genuinely self-employed 

Self-employed claimants of UC are also impacted by increases to the minimum wage even though they aren’t entitled to the minimum wage. The Minimum Income Floor (MIF) rules treat certain self-employed people as earning a certain amount, even if they haven’t. To work out your MIF you need to multiply the minimum wage for your age group by the number of hours you're expected to work. If the minimum wage goes up, this means the MIF goes up, and the amount of UC that self-employed people subject to the MIF can get will be reduced accordingly.

All of this means that the April 2025 minimum wage rises could increase the amount you are deemed to have earned even if you haven’t, and even where you can’t simply increase your income in response to the rises!