Budget 2026: minimum wage increases add to employers’ costs

The Government has announced that the national living wage (NLW) will increase from £12.71 to £13.21 per hour for workers aged 21 and over from April 2027. The national minimum wage rate (NMW) for workers aged 18 to 20 will also rise from £10.85 to £11.27 per hour, and the rate for workers aged 16-17 will also rise from £8.00 to £8.31 per hour, around a 3.9% increase for all rates.

Although welcome news for lower-paid workers, these national minimum wage increases will place further pressure on employers’ payroll costs, particularly in sectors with large numbers of employees paid at or close to the statutory minimum.

Employers should review arrangements such as pension salary sacrifice schemes, as these cannot reduce an employee’s cash earnings below the applicable minimum wage. Some employees who currently participate may therefore need to be removed from the scheme and the amount some employees can sacrifice may need to be restricted, while others may no longer be able to participate.

Employers should review affected workers and put appropriate payroll controls in place before April 2027 to avoid inadvertently creating a minimum wage underpayment.

Why national minimum wage compliance is not straightforward

Ensuring that the national minimum wage is paid sounds straightforward. Simply pay employees at least the rate set by HMRC. In practice, however, the process is far more complex. Businesses can fall into non‑compliance without ever intending to and the consequences can be severe.

Working time

A common pitfall is determining what counts as working time. Many employers assume only the hours an employee spends actively performing core duties need to meet minimum wage. In reality, working time can include training, mandatory meetings, travel between work sites, waiting time and even time spent putting on required protective equipment.

Time worked beyond an employee’s usual contractual hours can also need to be included in the national minimum wage calculation, including in some circumstances where the additional time has not been expressly authorised. When these additional minutes accumulate, the effective hourly rate can fall below the legal threshold, despite salaries appearing to be far from the lower end of the scale.

Complicating matters further, the way national minimum wage is calculated depends on the type of worker and how they are paid. There are four key worker types:

• Paid by the hour (time work)
• Paid an annual salary, under a contract for a basic number of hours each year (salaried hours)
• Paid by the piece – the number of things they make, or tasks they complete (output work)
• Paid in other ways (unmeasured work)

Deductions, accommodation and salary sacrifice

Deductions are commonly misunderstood areas of national minimum wage compliance because they feel like administrative decisions rather than pay‑related risks. Certain deductions and payments made by workers can reduce pay for NMW purposes, even where the employee has agreed to them.

Particular care is needed where employees are required to meet costs connected with their employment. For example, requiring employees to buy branded uniforms, safety boots, or specialist clothing can reduce their effective hourly rate if the cost is deducted from their wages. The same applies to tools, equipment, or even optional social events that are paid for through payroll.

Accommodation deductions are also often widely discounted. Special rules apply where an employer provides living accommodation. The accommodation offset is the only benefit in kind that can count towards NMW pay. Where an employer charges more than the permitted accommodation offset, the excess generally reduces pay for NMW purposes and can therefore create an underpayment.

Salary sacrifice arrangements (where an employee agrees to a reduced salary amount in return for a benefit such as a company car or additional pension contributions) can create complications for NMW compliance because it reduces an employee’s contractual cash pay. While these arrangements are entirely voluntary, NMW is assessed against the employee’s reduced cash earnings, disregarding the value of the benefit they receive. This means that even a small sacrifice can push an employees pay below the legal threshold if their base salary is close to NMW. As a result, employers must monitor these arrangements carefully, ensuring that benefits do not accidentally create underpayment risks.

Consequences of getting national minimum wage wrong

The penalties for NMW non‑compliance are among the most severe in employment law. Any arrears must be paid at the higher of the rate at the time and the rate of NMW when the error is corrected, and from April 2016, penalties can be levied at up to 200% of the arrears due (to a maximum of £20,000 per worker). The penalty can be reduced by 50% if all the unpaid wages and 50% of the penalty are paid in full within 14 days. Beyond financial penalties, the reputational impact can be even more damaging. HMRC have a public ‘name and shame’ list for employers who were caught not complying with NMW, even accidentally. Being named publicly for NMW breaches can damage trust with customers, employees, and the wider community. Even accidental underpayments can leave a lasting negative impression.

Which employers might feel more impact from national minimum wage increases?

The landscape of the job market varies greatly across different sectors. Some sectors of the job market have a much higher proportion of their workers paid at or around the minimum wage or are more likely to hire apprentices or younger workers. Key industries impacted in this way include the hospitality sector and health and social care. Still further, the total wage bill makes up a much larger proportion of the cost base in some industries, which once again particularly applies to the health and social care sector. Employers in these sectors may feel the impact of increases in NMW more strongly and be more at risk of penalties as a result.

Specific consequences could occur for public sector employers, from NHS trusts to schools and local councils, unless their funding is uplifted to reflect the additional cost. This typically happens but is not always guaranteed. Charities on the other hand, face no such uplift, and an increase in the minimum wage will not necessarily result in increases in charitable donations being made by the public. Finally, the construction industry may face specific challenges. As well as having a significant proportion of workers being paid the national minimum wage, tradespeople may already be tied into medium to long-term contracts agreed based on wage costs at the time. Where national minimum wage rates increase mid-contract, employers in this industry may be forced to absorb the additional costs and suffer reduced profit margins as a result.

Further cost pressures on employers

The April 2027 uplifts in national minimum and living wage rates represents an increase of around £1,000 to the annual earnings of a full-time worker on the NLW. The NLW has rapidly increased over the last few years, and this year’s budget announcement did not buck that trend, albeit the rise was the same as last year and at a slower jump than in previous years.

Previous national minimum wage increases

For reference, the previous rates are as follows:

Feedback from clients suggests that the large increases in NLW over recent years have not just affected the lowest paid workers, but also those in the grades and pay brackets above them. This is because the lowest paid have been catching up at a fast rate, creating pay disparity, and meaning employers are having to push up wages throughout their organisations.

It is worth noting that on top of increased costs in respect of higher wages, additional employers’ national insurance contributions will be due on these amounts. Employers are likely to consider dealing with these increased costs in several different ways, such as pay and recruitment freezes, increasing the prices of their goods and services, and trying to find other ways to cut business costs.

Supporting employers through change

This can be an uncertain time for employers, already facing spiralling costs, but our team of experts are on hand to provide guidance on the impact of changes and keep you up to date with the latest developments.

If you would like to reach out one of our team to discuss what the measures might mean to your business, and how we might be able to help, we would welcome you to contact us using the form below.