The Autumn Budget has left many small and medium-sized businesses reassessing how they reward their people.
With inflation still above long-term norms and employees feeling stretched, the expectation to deliver meaningful pay rises is greater than ever.
Yet the tax environment created by the Budget makes that task considerably more complex.
Frozen personal tax thresholds and continued fiscal drag, as well as upcoming pension reforms all contribute to a landscape where traditional salary increases do not travel as far as they once did.
For employers, this means every additional pound on payroll carries more cost and less impact.
Why employees notice less even when pay goes up
With Income Tax and National Insurance thresholds locked in place until 2031, a growing proportion of any rise is immediately absorbed into the tax system.
On paper, a pay uplift may look entirely reasonable, but the take-home figure may tell a different story.
Higher rate taxpayers already keep just over half of each additional pound they earn. Those in the £100,000 to £125,000 taper zone lose even more.
For employees in these brackets, net pay gains may feel marginal despite employers’ best efforts to keep pace with inflation.
This is why many business owners are finding that salary adjustments alone are no longer enough to boost morale or demonstrate fairness. The structure of the tax system is limiting the real-world value of pay awards.
Pension salary sacrifice: another challenge ahead
The coming reform to salary sacrifice from April 2029 introduces further pressure.
Currently, sacrificing salary for pension contributions is one of the most effective ways to increase retirement savings without significantly increasing employer costs.
The £2,000 limit on NIC relief will change that. Any sacrifice above this threshold will be treated as normal pay for NIC purposes, with employers charged 15 per cent and employees charged between two and eight per cent depending on their earnings.
This reduces the value of one of the last tax-efficient levers available to employers, while also affecting any NIC recycling employers currently share with staff.
This means that future pension support may feel noticeably smaller unless organisations adjust their approach.
Directors need to rethink remuneration too
Changes to dividend taxation are also set to reshape how company directors pay themselves.
From April 2026, the ordinary and higher rates of dividend tax will increase by two per cent, reducing the advantage of extracting profits through dividends instead of salary.
With changes to salary sacrifice, frozen thresholds and rising dividend tax, owners and directors will need to reassess their remuneration strategy to avoid additional strain on the business and ensure that drawings remain cost-efficient.
Why SMEs need to broaden their reward toolkit
The core problem is not simply the rise in tax but the narrowing gap between gross pay and what employees receive.
When most of the uplift disappears before it reaches a payslip, even well-intentioned employers may face:
To protect competitiveness, SMEs will need to expand their approach to reward. Some effective alternatives include:
These tools can often deliver more perceived value without the same tax drag as salary.
A more strategic approach to pay planning
Salary still matters, but the Autumn Budget has changed the calculations behind it. For many SMEs already managing rising overheads, the challenge is how to reward people fairly when the tax system takes an increasing share of the pot.
A more strategic, long-term approach to reward will become essential through the rest of the decade.
This includes reviewing pension arrangements, considering new incentive structures and communicating clearly with staff about why changes are happening.
If you would like support evaluating your pay and reward strategy in light of the latest Budget announcements, we are here to help.
Our specialist advisers can guide you through your options and help you build a structure that supports your team and your business sustainably.
