Combined impact of minimum wage and tax increases may reduce opportunities for young people

This week will see significant increases to both minimum wages and employer National Insurance contributions (NICs) take effect. The National Living Wage (NLW), which applies to those aged 21 or over, is rising by 3.4% in real terms (6.7% nominal) today to £12.21 per hour. The minimum wage for 18- to 20-year-olds will rise much more dramatically, by 12.7% in real terms (16.3% nominal) to £10 per hour, as part of the government’s manifesto promise to end what it considers “discriminatory” age bands and align the 18- to 20-year-old rate with the NLW. This is the biggest increase in the rate for 18- to 20-year-olds since the minimum wage was introduced in 1999, coming on top of the second-biggest real increase of 12.2% last year.1

The increase in labour costs will be amplified by an increase in employer NICs at the end of the week. The rate of employer NICs will rise from 13.8% to 15%, and the earnings threshold at which it is charged for workers aged 21 and over will fall from £9,100 to £5,000 per year.2 Whilst most young adults aged 18–20 will not be directly affected by the NICs increase – the vast majority are not subject to employer NICs – the industries that they tend to work in are those that will see the biggest rise in employer costs. Taken together, these changes may reduce job opportunities for young adults against a backdrop of falling employment among this group and a lack of reliable data to monitor labour market impacts.

How do these changes affect the cost of hiring?

Figure 1 shows the proportional increase in the cost of hiring different types of workers, adjusted for inflation. In 2025–26, the cost of hiring a full-time worker on the NLW (aged 21 or over) will be 7.1% higher than in 2024–25 in real terms (10.5% nominal). This is more than double the increase in employer costs for someone on average earnings (3.1% real, 6.4% nominal). The proportional increase in the cost of hiring a part-time NLW worker is higher still, at 10.6% adjusted for inflation (14.2% nominal).

Under-21s are generally not subject to employer NICs, as they face a much higher earnings threshold of £50,270 per year. However, the sharp rise in youth rates means that the cost of hiring an 18- to 20-year-old on the minimum wage will still go up by more than the cost of hiring an older adult, by 12.7% adjusted for inflation (16.3% nominal). Around 80,000 18- to 20-year-olds (9.4%) are paid their age-specific minimum wage and will be directly affected; a further 310,000 (36.3%) are paid at or below the NLW and will be affected as the 18–20 rate converges to the NLW.

Figure 1. Real change in employer cost due to changes in minimum wage and National Insurance contributions, 2025–26 versus 2024–25

_{Note: Assumes part-time worker works 16 hours per week and full-time worker works 35 hours per week. Cash increase for 16-17 and 18-20 minimum wage workers are given for a part-time worker. Median earnings for 2025–26 estimated based on ASHE 2024 and earnings growth forecasts from the Office for Budget Responsibility (OBR). Deflated using CPI figures from OBR. Does not include changes to the employment allowance.}

_{Source: Authors’ calculations using Annual Survey of Hours and Earnings (ASHE) and TAXBEN, the IFS tax and benefit microsimulation model.}

We estimate that employer costs will increase most in the industries where young people tend to work, as shown in Figure 2.3 The hospitality industry, which employs 28% of all 18- to 20-year-olds, will see employer costs go up by 3.8% in real terms (7.7% nominal) between 2024 and 2025, compared with a 2.5% real (6.4% nominal) increase across the whole economy. The wholesale & retail industry, where 26% of all 18- to 20-year-olds work, will see an increase of 3.1% in real terms (7.0% nominal).

The large rise in employer costs in hospitality reflects three things. First, hospitality workers tend to be low-paid, with 18% paid their age-specific minimum wage.4 Second, workers aged 20 and below, who will see especially large increases in their minimum wage rates, make up a quarter (24%) of all workers in hospitality. Third, hospitality businesses make more use of youth rates than other sectors, where young workers are often paid the adult rate out of fairness concerns and for other reasons. 13% of 18- to 20-year-olds in hospitality were paid the youth rate (as opposed to the NLW) in 2024, compared with 6% in retail, which has comparable shares of minimum wage workers among those aged 21 and over.

Figure 2. Estimated real increase in employer cost between 2024 and 2025 (left panel) and share of all workers aged 18–20 in 2024 (right panel), by industry

_{Note: Excludes apprentices and missing industries. Assumes same wage increase between 2024 and 2025 for all workers not covered by the age-specific minimum wage. Does not include changes to the employment allowance. ‘Hospitality’ refers to ‘Accommodation and food services’.}

_{Source: Authors’ calculations using Annual Survey of Hours and Earnings, 2024.}

What does this mean for young adults?

The rise in the youth rate this April will bring a significant pay rise for young adults on the minimum wage. But in raising the relative cost of employing young workers, it will also make it more attractive for firms to employ older, more experienced workers. More broadly, the changes taking effect this week incentivise firms to make greater use of higher-skilled (higher-paid) workers, self-employed subcontractors and labour-saving technologies such as tablet ordering or self-checkouts – all of which could limit employment opportunities for young people.

Firms in hospitality and wholesale & retail, which often provide the first rung of the career ladder, will see the biggest rise in employment costs. Some firms may be able to absorb the cost increase through lower profits, pass it on to consumers in the form of higher prices or pass it on to their higher-paid staff in the form of lower wages (those not bound by the minimum wage). However, other firms may have to reduce hiring, lay off staff or close down altogether. This means that the rise in employer costs generated by the NICs increase could reduce job opportunities for young adults, even though it does not apply to them directly. Given that cutting back on hiring is likely to be easier for firms than laying off existing staff, any reductions in employment as a result of these changes will disproportionately affect new entrants into the labour market.

Labour demand in the hospitality and wholesale & retail sectors already appears to be falling more quickly than in other sectors, with vacancies down by 41% and 32% respectively since the start of 2023, and the number of payrolled employees down by 2.1% and 0.9% respectively. This compares with an economy-wide fall in vacancies of 27% and an increase in payrolled employees of 1.3%, as shown in Figure 3. Young people are increasingly starting out in these sectors as stepping stones to higher-paid jobs, so contractions in these sectors could have long-lasting effects on their career trajectories.

Figure 3. Payrolled employees (left panel) and vacancies (right panel) indexed to January–March 2023, by industry

_{Note: Seasonally adjusted. Figures are three-month averages. ‘Hospitality’ refers to ‘Accommodation and food services’.}

_{Source: RTI statistics and ONS VACS02 series.}

The increase in employment costs is happening against a backdrop of cooling labour demand and concerns over rising NEET rates (the share of young people not in employment, education or training). Headline figures based on the Labour Force Survey suggest that the NEET rate among 18- to 24-year-olds increased from 13.7% in the first quarter of 2023 to 15.8% in the last quarter of 2024. There are serious concerns over the reliability of these statistics, but administrative payroll data presented in Figure 4 also show a 1.2% fall in the number of 18- to 24-year-olds employed between 2023Q1 and the latest data (December 2024–February 2025), against a 1.3% increase in the total number of employees. Claims for health-related benefits among 18- to 24-year-olds have continued to rise, up 19% from February 2023 to August 2024.

Figure 4. Number of payrolled employees aged 18–24 (left axis) and 25+ (right axis), thousands

_{Note: Seasonally adjusted. Figures are three-month averages. The length of each vertical axis represents roughly a 5% change above and below the pre-COVID (December 2019–February 2020) number of employees.}

_{Source: RTI statistics.}

Recent research has not generally found that minimum wage rises reduce employment, but there is some evidence of more negative effects for young people, in particular teenagers. This is one reason many countries have youth rates that are lower than the adult minimum wage. Another reason is that spells of unemployment are particularly harmful for young people, as evidence shows that they have long-lasting ‘scarring’ effects on employment and earnings trajectories.

Young workers on the minimum wage will benefit from the large boost to their pay packets as a result of the policies taking effect this week. But others may face diminished job opportunities, as firms shift towards hiring older workers or reduce hiring overall. This may make it harder for the government to deliver on its Youth Guarantee, which pledges to ensure all young people aged 18–21 are either ‘learning or earning’, and may have long-term consequences for young people’s careers. Given the current context of a cooling labour market and potentially rising NEET rates, it would be unwise to rush to abolish the 18–20 minimum wage which, even after recent dramatic increases, is still 18% lower than the NLW. It will be important to closely monitor the impact of upcoming changes on young people – a task made difficult by a lack of reliable data.