The UK's ‘National Minimum Wage’ was introduced in 1999 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 2026
From the 1 April 2026, the National Living Wage, the Government’s re-branded minimum wage for those aged 21 and over, would rise from £12.21 to £12.71 this month. This 4.1% increase is on the back of two consecutive years of double-digit increases.
The Real Living Wage, a voluntary amount set by the Living Wage Foundation, also increases to £13.45 in the UK and £14.80 in London (up 6.7% and 6.9%).
Cost of living pressures
Initial indications from the Office for Budget Responsibility and Bank of England suggested a steadily fall in inflation during 2026. This would reduce the pressures for organisations when determining cost of living adjustments with inflation predicted to fall in line with the Bank of England’s 2% inflation target by early 2027. The recent conflict in the middle east, pushing up oil prices and fears of a global recession suggest that these predictions of falling inflation in 2026 are unlikely.
The 4.1% increase in the National Living Wage is above current inflation levels. The increase is required to ensure that the rate does not fall below two-thirds of UK median earnings. It will be the lowest increase in the rate since 2021, which was impacted by COVID and furlough arrangements. Further increases in inflation, in the wake of the conflict in the middle east, will likely push the cost-of-living debate back up the agenda for businesses.
Compression challenges
The challenge caused by increasing entry level pay over the past few years is the reduction in differentials between these rates and more senior or skilled employees. This creates a ‘compression’ effect as pay increases at the grades above are increased at a lower rate.
Research by Robert Half outlined the challenge of pay progression is increasing amongst employers, with almost three quarters experiencing the issue within the past year. This has led to retention challenges in some organisations where staff perceive the additional skills or requirements in the post are not recognised in pay. This creates a challenge for organisations to address through targeted increases but often the budgets available restrict ability to fully address this issue.
The research also outlined nearly 7 in 10 organisations felt addressing pay compression was more important than in previous 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.
Increasing 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.
Simon Cook is a Lead Consultant at Innecto, the UK’s largest independent pay and reward consultancy. For more information on how our team can support yours, contact us today
