The government has announced the new rates for the National Living and Minimum Wages from April 2026. Set against the backdrop of the latest Budget, what does this mean for employers? 

Somewhat earlier than usual, the government announced the new rates for the National Living and Minimum Wages from April 2026, shortly before the full Budget. As expected, rates for all ages of worker have increased again – although not as sharply as last year.

What are the new rates?

In April 2026, the hourly rates will increase as follows.

National Living Wage:

  • For 21 year olds upwards, an increase from £12.21 to £12.71.

National Minimum Wage:

  • For 18 to 20 year olds, an increase from £10.00 to £10.85.
  • For 16 and 17 year olds and apprentices, an increase from £7.55 to £8.

In this article, we refer to these two categories (the National Living Wage and the National Minimum Wage) together as the NMW. As a reminder, the National Living Wage is not the same as the Living Wage (set by the Living Wage Foundation), which is a higher voluntary rate linked to the cost of living.

The higher percentage increase in the 18-20 NMW rate (of 8.5%) continues the government’s intended move towards extending the National Living Wage to all adults, although it is significantly lower than the 16.3% increase this year.

Implications for employers

As we wrote about earlier in the year, increasing NMW rates pose various challenges for employers. These include ensuring compliance when basic pay sits just above the new NMW level, meaning more workers fall into the danger zone, and pay compression between junior and senior staff becomes more of a challenge.

Another critical point is the concertinaing of progression frameworks. As the lowest possible pay increases, it becomes more expensive for employers to reward high skills, and to incentivise employees to take on additional responsibilities and encourage proactivity and development. These types of performance-related pay incentives are a crucial part of increasing productivity, but they lose value if there is only a small pay differential between basic and higher performance, and people become reluctant to take on additional responsibilities if they cannot see the reward in doing so. The current government says that it is prioritising economic growth, and increased productivity is key. This may be damaged if ongoing increased costs for employers mean that they cannot afford to incentivise productivity through higher pay.

There is a tension here with policy considerations about pay for the youngest workers. The government is committed to equalising pay, but there are arguments that this could be a disincentive to businesses to give someone their first job if a more experienced worker costs the same. This comes at the same time as concerns about AI reducing or even removing altogether many starter level jobs.

It is worth noting that employers already have some hidden additional costs after the Budget, as the freezing of NIC thresholds will increase the number of employees who earn enough to require employer contributions, and the removal of pension salary sacrifice above a certain level will also increase employer NIC costs. Increased NMW will also bring more employees within income tax and NIC thresholds for the first time, meaning employers will need to be prepared to deal with queries from employees about why their pay rise does not seem as much as expected. The changes to the rules on salary sacrifice for pensions do arguably help to equalise the position for lower paid workers, because those at or close to the NMW were unable to sacrifice salary and so benefit from the available tax breaks.

Increased enforcement risks?

The new Fair Work Agency, which is taking over NMW enforcement from HMRC’s National Minimum Wage Enforcement Team, is currently due to be established at the same time as the NMW rise in April 2026 (subject to the Employment Rights Bill having finally been passed in time). The Fair Work Agency will retain the same powers, but may well take a different approach to how these powers are used in practice. It remains to be seen whether they will have sufficient funding and resourcing to operate effectively, but the appointment of Matthew Taylor as the first agency chair (the author of the 2017 review of modern working practices) suggests that there will be a serious focus on improving labour market enforcement.

With penalties of 200% of the amount you have underpaid, it is really worth investing in NMW compliance early.  We can support you with an NMW audit, by reviewing main aspects of pay policy, ensuring key areas of compliance are met, and providing support with remedying any breach - your usual Lewis Silkin contact can tell you more.  

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