At Innecto, we help organisations make confident, evidence-led reward decisions - and the Autumn Budget has set the tone for what pay planning will look like in 2026.
Employers have been anxiously awaiting the announcement from Rachel Reeves, and the statement on 26 November introduced several measures that will directly influence pay budgeting for next year. With new wage floors, shifting cost pressures, and structural changes emerging, reward professionals need to understand the implications now. Below are the key areas that will shape pay planning and what they mean for your organisation.
Pay Compression Challenges from Minimum Wage Increases
From April 2026, the National Living Wage (NLW) for workers aged 21+ will rise to £12.71 per hour, a 4.1% increase on the previous year. This above-inflation uplift follows several years of significant increases to the wage floor, which have steadily eroded pay differentials between the lowest-paid roles and those in adjacent grades—such as graduate or supervisory positions.
As entry-level pay approaches higher bands, differentiation becomes harder to maintain, weakening the link between responsibility, skill, and reward. Employers will likely need to:
- Review job bands and pay structures to preserve meaningful differentials.
- Allocate more budget to lower grades, which may reduce funds available for technical or managerial roles.
- Balance fairness at entry levels with competitiveness for senior positions in the market.
The voluntary Living Wage has also risen by 6.7%, adding further pressure to maintain clarity and equity across pay frameworks.
Cost-of-Living Pressures and Pay Awards
Headline inflation is believed to have peaked, with the OBR forecasting 3.5% for 2025. In contrast, median pay awards for 2026 are projected at 3%. When inflation outpaces pay growth, employees experience a real-terms pay cut.
Budget measures, such as scrapping the two-child benefit cap, freezing rail fares, and reducing energy levies, aim to ease cost-of-living pressures. However, if inflation does not quickly return to the Bank of England’s 2% target, employers risk:
- Morale and retention challenges, potentially leading to one-off “catch-up” payments.
- Increased complexity in pay planning, as entry-level wages will rise faster than median awards.
Employers should consider scenario-plan for inflation remaining above 3% and model the combined impact of rising wage floors and constrained pay budgets.
Pension Salary Sacrifice Changes
The Budget also signaled a major shift in salary sacrifice pension arrangements. From April 2029, a £2,000 cap will apply to the amount employees can contribute before incurring National Insurance charges. While this change is several years away, it will:
- Increase costs for both employees and employers, especially where matching schemes exist.
- Require adjustments to salary budgets to maintain competitiveness.
- Prompt a review of total reward strategies, as benefits such as pensions may become more expensive.
Employers should also consider offering financial education and advice, as rising costs may discourage employees from contributing to their pension pots.
A Triple Challenge and Opportunity
The combination of a rising wage floor, persistent cost-of-living pressures, and changes to pension tax relief creates a triple challenge for reward professionals. Yet, it also presents an opportunity to rethink reward strategy:
- Move beyond annual pay increases to a holistic total reward approach.
- Align pay, benefits, and career development with business objectives and affordability.
- Communicate the full value of employment clearly to employees.
The Autumn Budget adds cost pressures, but strategic planning now will help organisations remain competitive and attractive to talent in 2026 and beyond.
Conclusion
For reward leaders, the Autumn Budget creates a perfect storm of rising wage floors, squeezed pay awards, and future pension cost increases. But it’s also a moment to rethink how reward supports business performance. Innecto can help you navigate the trade-offs, model the cost impacts, and build a future-proof pay strategy that keeps your organisation competitive in 2026 and beyond.
Our annual Pay Trends event is taking place on 29th January 2026 where we’ll be exploring how shifting work models are reshaping organisation design and career paths, and the impact on pay and reward.
Limited spaces available – register now
