Millions of Minimum Wage Workers Set for Pay Rise as Budget Looms – What It Means for Your Pay Packet and Salary Sacrifice Benefits

Millions of workers across the UK will receive a pay rise next year after the government confirmed a new round of minimum wage increases, the latest in a series of measures being drip-fed ahead of Rachel Reeves’s long-awaited Budget. The rise will deliver a direct boost to low-income earners at a time when households continue to grapple with high living costs, strained local services and the lingering effects of the inflation shock.

But tomorrow’s Budget is also expected to include key decisions affecting salary sacrifice schemes – benefits widely used by employees to reduce their taxable income in exchange for non-cash perks, such as pension contributions, cycle-to-work arrangements and electric vehicle leasing. Reports suggest Reeves has been considering reforms that could reshape how millions save for retirement or access employer-backed benefits.

With the Budget just hours away, both workers and employers are watching closely for signals of the government’s direction of travel on wages, tax reliefs and disposable income. Here’s what we know so far.

Millions to Receive Minimum Wage Increase From April

The government has announced that the minimum wage for millions of workers will rise from April next year, following recommendations from the Low Pay Commission. While the full breakdown of each age band will be detailed in tomorrow’s Budget, the headline figure reflects a continued effort to transition the UK towards a higher-wage economic model.

The increase follows years of political focus on raising living standards at the lower end of the income spectrum. After inflation surged to a 40-year high in 2022 and continued to outpace wage growth for much of the past three years, the real value of earnings for many workers eroded sharply. The rise is intended to begin restoring some of that lost ground.

Low Pay Commission data shows that:

Over 2.5 million workers in the UK currently earn the minimum wage.
 

Women, especially those working part-time, make up a disproportionately large share of minimum wage earners.
 

Retail, hospitality, cleaning and care sectors have the highest concentration of workers affected by minimum wage legislation.
 

A 4% to 5% rise – in line with early projections – would lift minimum earnings by hundreds of pounds a year for full-time workers. For young people, apprentices and those in part-time roles, the increase could be significant, particularly as pressure persists on rents, energy bills and food costs.

Unions have welcomed the announcement, calling it “a necessary step” but arguing that more needs to be done to transition the UK towards a full living wage. Employers, meanwhile, have issued more mixed reactions. While many large companies say they can absorb the costs, small and medium-sized businesses have raised concerns about labour expenses at a time when interest rates remain elevated and consumer demand is muted.

Why the Minimum Wage is Rising Now

The timing is politically significant. Reeves will present her Budget amid stiff fiscal constraints: the government must juggle demands for public spending increases, commitments to keep borrowing in check, and pressure to support an economy that has hovered on the brink of recession.

Raising the minimum wage ahead of the Budget helps the government send a clear message – that it intends to support working households directly without relying solely on tax reforms or benefits uprating. It also allows Reeves to anchor her budget narrative around fairness, productivity and financial responsibility.

Economists broadly agree that a carefully calibrated minimum wage increase can stimulate spending, particularly because low-income workers are more likely to spend additional income than save it. However, concerns remain that if wages rise too quickly for employers already under pressure, job cuts or reduced working hours could follow.

The government is therefore expected to pair the minimum wage increase with support measures for businesses or changes to employer-related tax reliefs to minimise cost burdens.

Salary Sacrifice Schemes Under Review: What Could Change?

The second major area of focus ahead of the Budget concerns salary sacrifice schemes – an arrangement where employees give up part of their salary in exchange for tax-efficient benefits. These schemes are often used for:

Pension contributions
 

Electric vehicle leasing
 

Cycle-to-work schemes
 

Childcare vouchers (for those still eligible)
 

Additional annual leave
 

Health and dental plans
 

To date, salary sacrifice has been a widely embraced method of reducing taxable income while incentivising environmentally friendly or socially beneficial behaviours. But reports suggest that Reeves has been reviewing whether the current framework represents a fair distribution of tax advantages.

Why Salary Sacrifice is Under Scrutiny

Salary sacrifice costs the Treasury billions in forgone tax revenue each year. While many schemes are modest in size, others – particularly electric vehicle leasing arrangements – offer substantial savings because employees avoid income tax and national insurance contributions on the sacrificed salary amount. For higher earners, this can mean thousands of pounds of tax savings annually.

Critics argue that the system disproportionately benefits those who already earn enough to reduce their salary without financial strain. Meanwhile, lower earners who cannot afford to sacrifice income miss out on comparable advantages.

The Treasury is therefore reportedly exploring whether to:

Cap the value of tax-advantaged salary sacrifice benefits
 

Restrict schemes to certain categories (e.g., pensions and green transport only)
 

Limit the use of salary sacrifice for high-value electric vehicle leases
 

Introduce a minimum salary floor to prevent workers falling below statutory wage levels after sacrifice
 

No decision has been confirmed, but any major reform would affect both workers and employers.

What It Means for Employees

For minimum wage workers, the most immediate consequence comes from the wage rise itself: a guaranteed higher hourly rate from April.

However, salary sacrifice changes could also indirectly affect millions of workers higher up the income ladder:

Pension saving could become less tax-efficient, depending on the structure of any reform.
 

Electric vehicle schemes could become more expensive, reducing employer incentives to switch to EVs.
 

Cycle-to-work schemes may remain untouched, given their long-standing popularity and modest tax impact.
 

Higher earners may face limits on how much salary they can sacrifice annually.
 

Workers will need to review their benefits packages after the Budget and may need guidance from employers or financial advisers to understand whether their take-home pay will change.

What It Means for Employers

Businesses relying heavily on salary sacrifice to offset employment costs or attract talent may need to adjust benefit structures. For example:

Companies offering electric vehicle salary sacrifice fleets may need to redesign programmes.
 

Firms providing enhanced pension contributions via salary sacrifice may face higher national insurance costs.
 

Small businesses worried about minimum wage increases may lobby for transitional relief or targeted tax support.
 

Employers are already preparing for multiple Budget scenarios, especially in sectors where margins are thin.

Why Reeves’s Decision Matters

Rachel Reeves faces intense pressure from both sides of the political spectrum. On one hand, she must demonstrate fiscal responsibility by closing tax loopholes, raising targeted revenue and controlling borrowing. On the other, she must support workers’ incomes, stimulate economic demand and avoid damaging business confidence.

Salary sacrifice sits at the intersection of these tensions. Any substantial reform will be politically sensitive:

Reforming the system could improve tax fairness and raise funds, but risk backlash from businesses and middle-income professionals.
 

Keeping the system untouched would avoid disruption, but critics say it would preserve inequities in the tax code.
 

Coupled with the minimum wage rise, tomorrow’s Budget will give the clearest signal yet of how Reeves intends to balance growth, fairness and fiscal constraint.

Budget Day: What to Expect

Analysts expect several key themes in tomorrow’s Budget announcement:

A focus on earnings and living standards, anchored by the minimum wage uplift
 

Possible tax changes affecting capital gains, pensions or property
 

Public service investment targets, particularly in health and education
 

Revisions to borrowing forecasts, which will shape spending limits
 

Clarification on salary sacrifice rules, which could be one of the most consequential changes for middle-class households
 

The government has framed the Budget as an opportunity to restore stability after years of economic volatility, from the pandemic to the inflation shock to the disruption of previous fiscal missteps.

A Turning Point for Workers’ Pay and Financial Planning

For now, millions of workers are set to benefit from a long-awaited increase to the minimum wage. The rise represents an important milestone at a time when household budgets remain under intense pressure.

But tomorrow’s decisions – particularly around salary sacrifice – could reshape how workers save, invest and plan for the future. Whether Reeves opts for reform or continuity, the impact will be felt for years to come across both the labour market and the wider UK economy.

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