The recent announcement by the Low Pay Commission of the forecasted National Living Wage rate, the smallest increase in 5 years, is predicted to be above current inflation levels. This will likely lead to another pay round of HR and Reward professionals trying to balance the increase in costs across the overall pay pot.
The UK's ‘National Living Wage’ was introduced in 1999, known previously as the ‘Minimum Wage’, to protect the lowest paid and has since been expanded to cover over 2 million workers, ensuring they receive a fair rate of pay for their labour.
Brought in by Tony Blair’s New Labour, the main drivers were to reduce inequality and improve living standards for the lowest paid, tackle poverty, prevent exploitation by unscrupulous employers and improve productivity for businesses by reducing turnover and the time and cost of recruiting new staff
The measure was, and still is, broadly popular with the public, but economists have always cautioned against setting the minimum rate too high as it could negatively impact business, and lead to higher unemployment. In short, it is a difficult balancing act between increasing living standards for many low pay workers whilst ensuring businesses can afford the cost increases.
National Living Wage
The Low Pay Commission forecasts the National Living Wage will increase by 4.1% in April 2026. Whilst formal decision will made in the autumn budget, it signals the above inflation predicted increase required to ensure that the rate does not fall below two-thirds of UK median earnings. If confirmed, it will be the lowest increase since 2021 in the rate which was impacted by COVID and furlough arrangements. The increase in 2025 was 6.7% on the back of two consecutive years of double-digit increases.
Impact on workers and businesses
These predicted increases come at a time when organisations are still feeling the effects of the Employer’s National Insurance increase from 13.8% to 15%. The rising cost to the pay bill for many employers has resulted in adjustments to their plans. Looking at the broader spectrum of pay, we were already expecting smaller increases in 2025 than in 2024, partly fuelled by businesses passing on these rising costs to employees in the form of lower pay awards.
Research by Innecto found that almost half of employers had reviewed decreasing their overall pay review budgets in response to the NI increase. This is also evident in findings from Brightmine, which forecast the median pay award for the next 12 months to be 3%, down from 4.7% in 2024 and 6% in 2023.
Our key challenge as HR and finance professionals is to balance the rising ‘floor’ of base wages by 5% - 6.7% with pay awards predicted to be almost half of these rates. The challenge of dealing with ‘wage compression’, where the differences between roles or grades is eroded, has been moving up the agenda over the past few years.
Removing grades or amending pay points will go a certain way towards meeting the challenge, but businesses could struggle to find a sustainable solution without a more radical review of their current pay structures. We would recommend three key considerations:
- Job Evaluation – can you objectively compare the size of your roles?
Having clarity over the pay differentials between skill levels, or between managers and their teams, depends on the roles in question and should reflect the difference in the size of the roles. A robust Job Evaluation tool like Evaluate allows you to objectively size roles based on:
- the expertise needed to perform the role
- the complexity of the role
- the impact the role has on overall organisational performance
- Progression Mechanism – how robust is yours?
It’s crucial to understand the impact of your current progression mechanic. By analysing your distribution of pay awards, or any increased movement, you can understand what might compound wage compression.
We have supported various clients to put in place clear and consistent criteria for pay progression which align with the company’s goals.
- Benchmark – how do you compare to the market?
Market data can help us understand typical pay differentials between roles, and inform whether decisions need to be made in the short term to stay competitive or can be phased in over a longer period.
Using a specialist Pay Benchmarking tool like PayLab can help with this, and also helps you analyse the same data to compare individual workers against the market and bring clarity to what is the ‘market rate’. This is based on robust market data, rather than salary information from recruitment sites or Glassdoor, which take into account the scope of a role. This can help a lot in mitigating or explaining any anomalies that may have happened, typically due to length of service, performance-based increases or legacy agreements.
On top of high business rates and the NI hike this uplift in living wage rates will put a squeeze on our ability to derive maximum impact from pay pots while maintaining pay differentials. By using specialist tech tools to fully understand our pay data against the market, we can make clear, informed decisions that work both for us and our workers.
