Employment costs are set to rise again in 2026, and with new legal obligations arriving throughout the year, many UK SMEs will see meaningful shifts in payroll spend and compliance requirements. Planning ahead now will help protect your cashflow and give your business the confidence to adapt smoothly. At Simpson Wreford LLP, we're here to guide you through every step.
Key Payroll Cost Increases for 2026
From 1 April 2026, the Government has confirmed an increase in minimum pay rates across the board:
- National Living Wage (21+): rising from £12.21 to £12.71 per hour (4.1% increase)
- 18–20 rate: increasing from £10.00 to £10.85 per hour (8.5% rise)
- 16–17 and apprentice rate: increasing from £7.55 to £8.00 per hour (6% rise)
These changes will increase payroll costs for most sectors, especially those employing younger or lower-paid workers.
Statutory payments such as sick pay are also expected to increase as part of wider employment reforms. With wage growth still strong, SMEs may want to budget for 3% (or higher) average pay awards to maintain internal pay differentials.
Employment Law Updates Coming in 2026
Significant elements of the Employment Rights Act 2025 will come into force throughout 2026, bringing new rights for workers and new responsibilities for employers.
From April 2026
- Day-one paternity leave and unpaid parental leave become standard.
- Statutory Sick Pay reforms remove the waiting period and lower earnings limit, meaning SSP becomes payable from day one.
- Collective redundancy protective award doubles from 90 to 180 days' pay.
- Introduction of the Fair Work Agency to strengthen labour standards.
These changes will likely increase absence-related costs and require updates to internal policies, handbooks, and manager training.
Practical Budgeting Actions for SMEs
To stay ahead of rising costs and compliance requirements, SMEs should:
- Run payroll forecasts using 2026 rates
Your payroll software or similar HMRC-compliant tools can help you understand the monthly impact. (New wage rates effective April 2026 listed above.)
- Check employment contracts against new wage and rights rules
Ensure pay rates meet the 2026 minimums and update clauses relating to paternity, parental leave, SSP, and flexibility provisions.
- Allow for 2–4% staff cost inflation
This reflects mandatory wage increases, statutory payment changes, and pay progression pressures.
- Claim available reliefs
Make full use of the Employment Allowance and explore grants or incentives relevant to innovation, sustainability, or workforce development.
Compliance Steps: Preparing for Making Tax Digital in 2026
Making Tax Digital for Income Tax (MTD ITSA) goes live on 6 April 2026 for individuals with qualifying income over £50,000 from self-employment and/or property.
Affected business owners and landlords must:
- Keep digital records
- Use MTD-compatible software
- Submit quarterly digital updates instead of one annual tax return
Those with income above £30,000 will join in April 2027, and above £20,000 in 2028.
While most SMEs will not be directly affected through PAYE, it's essential that owner-managers and landlords within the business prepare early. For further details check out this article.
If you have any questions or would like tailored advice, our team is here to help - contact us.