Over the past few years, we've witnessed high inflation and, in part due to this, significant salary inflation. However, only at the tail end of 2024 did we begin to see salary increases that met or exceeded the inflation rate. This means that while many employees have experienced substantial pay increases, they have still not kept up with people's real term cost of living.

With this backdrop and entering a period where more organisations report feeling cautious and unsure of the future and facing new costs from the April NI increases, it can be hard to decide what the right level of salary increase (if any) should be factored into 2025. Although we can’t give you a precise number (sorry!), as a lot will come down to your organisational needs and priorities, we can help you consider the factors that may influence your salary decisions in 2025.

WHAT SHOULD WE CONSIDER WHEN LOOKING AT PAY INCREASES?

There isn’t a single answer to this, but the factors that organisations will generally consider tend to be one or more of the following:

1. Inflation
2. Salary & Market trends/rates
3. Pay Equity
4. Affordability

INFLATION

What is inflation?

This is the comparison of the general level of prices for goods and services year on year. It tells us how far our money will go compared to the previous year. In the UK, this is primarily measured by the Consumer Price Index (CPI) and the Consumer Price Index including Housing (CPIH). CPI tracks the average change over time in the prices consumers pay for a wide range of goods and services, while CPIH adds housing costs, such as rent and council tax, to this figure.

Traditionally, CPI has been the measure reward experts use when considering pay increases, and organisations like the Bank of England tend to focus on it in their reports. However, there is an argument that CPIH is a more comprehensive measure of people’s costs in “real life” as it considers housing. In recent history, CPIH has tracked higher than CPI, which may make it less appealing for organisations to consider, and right now, CPI is still the metric most people consider when talking about inflation and salary increases.

What is inflation now, and where is it predicted to go?

Now (January 2025 Inflation reported February 2025):

• CPI – 3%, up from 2.5% in December and the 1.7% low point of September 2024
• CPIH – 3.9%, up from 3.5% in December and the 2.6% low point of September 2024.

Predictions:

The Bank of England predicts that CPI will continue to rise in 2025, reaching 3.7% in Q3 of 2025. This is significantly off the targeted rate of below 2%.

SALARY & MARKET TRENDS

According to the Office of National Statistics, the annual growth in regular earnings (salary excluding bonuses) was 5.9% between October and December 2024, with 6.2% being the average rate within the private sector. This was a “real-term” increase of 2.5% (the level of average increase minus the CPIH rate)—the highest it has been since June to August 2021. The last quarter of 2024 reflected a general trend of increased salary inflation over the longer term. That said, current predictions are that we will see a reduction in the rate of salary inflation in 2025.

The most recent market data predictions for salary increase budgets in 2025 were between 3% and 4%; this is lower than in previous years but still above current inflation. The CIPD’s “Labour Market Outlook” report published in February 2025 shows a predicted 3% increase in salary raises in 2025, the same as they reported in the previous quarter. This has stayed the same, even though some predictions have changed.

The CIPD reports that the level of organisations predicting the need to make redundancies has increased (from 11% to 16%), and there is a decrease in organisations that plan to increase staff numbers (from 32% to 29%). The increase in NI and lower economic confidence is a key driver of the changing predictions of their report.

Over 2024, we saw a slow drop in reported job vacancies, which is predicted to continue in 2025. Since the end of Covid, there has been a very candidate-driven market, which can drive higher wages as demand for people outstrips candidates and competition is fierce for the best people. A less active recruitment market can lower wage inflation, as less competition exists to retain or hire people. That said, as of January 2025, we still have 2.9% more vacancies than the pre-covid period. People with scarce skills or “high talent” will also always be in demand and able to move if they want to, so be cautious of thinking people can’t move if they are unhappy.

Finally, moving away from broader trends, it might be worth benchmarking some roles before making final salary budget decisions, especially ones with scarce skills or that are key for your organisation. Sometimes, specific roles change beyond the market norm, especially where there is high demand for a skillset, and you want to avoid underpaying someone you can’t afford to lose.

EQUITY

You should consider whether people are being paid fairly against comparative roles. If there are differences in pay between people doing similar roles, ensure that these are fair and objectively justified, especially when there may be people of different genders, ethnicities, or those who are otherwise in a group that may be disadvantaged.

You should also ensure that if you give people different increases, you can clearly explain why and demonstrate that it is fair and based on objective factors, not bias or perceived value.

AFFORDABILITY

As a rule, affordability is often a deciding factor, especially for smaller organisations. While affordability is key, it’s essential to consider the direct cost of increases against the risks of disengagement if people feel you are not treating them fairly with increases. Also, consider the impact that falling out of line with the market can have on retention.

A drop in engagement tends to harm productivity and losing people you want to retain can have direct costs, such as recruitment and training costs, as well as indirect costs, such as your time, loss of skills or reduced ability to meet the organisation's needs. It’s, therefore, essential to balance the short-term and longer-term impact when considering salary increases.

SUMMARY AND BEYOND THE NUMBERS

As we said at the start, there is no “right” answer to “What increase should I give people?”; it will come down to your organisation, your people, and the right factors for you to consider in that context.

Beyond the figures, though, you need to understand the impact of any proposals on your people carefully, assess any risks and challenges, and ensure you can communicate effectively and clearly to everyone. If you are worried about losing someone because you can’t afford the increase you would like to give them, work out what else you can do to engage them.

It’s also important to realise that salary is often a “hygiene factor.” Get it wrong, and you will probably know about it; get it right, and people might say “thank you”, but it tends to be the other aspects of work that get them fired up and engaged. Don’t assume that giving people a reasonable increase is enough to retain them and keep them working hard for the rest of the year. People are complex, so you must consider what you are doing in the round to ensure that you keep them focused and at their best.

HOW CAN THE LITTLE HR DEPARTMENT SUPPORT YOU?

There are several ways we can help, both with your salary reviews and with the well-being and engagement of your employees:

Salary benchmarking – analyse your employees’ salaries against the market, ensuring they are competitive and that there is fairness and equity internally.

Reviewing your benefits - giving you insight into what the market and your competitors are offering. We can work to your budget – including low cost and no cost benefits!

Employee engagement surveys – find out how happy and engaged your employees are and how they actually feel about their salary and benefits.

If you’d like to know more about these options, please contact us.