Employment cost rises: Where things stand in 2026/27, and what's coming next

Employment costs have increased again, and the shape of that cost is changing too. Minimum wage and frozen tax thresholds are the visible part. Less visible, but arguably more significant for benefits strategy, is what's building in pensions: a confirmed change to salary sacrifice from 2029, and a longer-running reform agenda that could increase the cost of automatic enrolment itself. Employers who model both now will have far more control over cost and communication than those who wait for either to land.

Where employment costs stand in 2026/27

1. Employer National Insurance. 

The rate holds at 15%, and the secondary threshold stays at £5,000, both now frozen until 2030/31. The Employment Allowance has increased to £10,500, and the government has removed the cap that stopped larger employers claiming it., so it is worth checking if you have previously assumed you weren't eligible.

2. National Minimum Wage.

Rates rose again from 1 April 2026: £12.71 for workers 21 and over (up 4.1% from £12.21), £10.85 for 18- to 20-year-olds, and £8.00 for under-18s and apprentices. Younger workers saw the steepest rises, as government looks to continue moving towards a single rate across age bands. Anyone with staff paid close to these thresholds should check for compression further up the pay scale.

3. Frozen tax thresholds.

Income tax and National Insurance Contributions (NIC)thresholds are now frozen until 2030/31. Every pay rise between now and then pulls more employees into higher tax and NIC bands, which keeps the pressure on for benefits and salary sacrifice that reduce taxable pay rather than add to it.

Pension costs: two changes building on the horizon

Two separate developments are pushing in the same direction: pensions are about to get more expensive to run, and for some employees, less NIC-efficient to fund.

The salary sacrifice pension cap.

From April 2029, salary sacrifice pension contributions above £2,000 a year lose their National Insurance exemption, for both employer and employee. Below £2,000, nothing changes. Above it, the excess is treated as ordinary earnings for NIC purposes. This change is now less than three years away, and payroll systems will need to track sacrifice against the cap per employee. Higher earners and higher contributors are affected first, and any employer design that currently shares the NIC saving back into the pension needs revisiting before the saving shrinks.

Automatic enrolment reform.

Separately, government already holds the legal power to remove the lower earnings limit on qualifying earnings, so contributions are calculated from the first pound earned rather than above £6,240, and to lower the enrolment age from 22 to 18. Neither has been implemented for 2026/27, and the Pensions Commission is still working through the wider question of adequacy and long-term contribution rates. But the mechanism is already in law. If and when either change moves forward, it increases the pensionable earnings base and, most likely, the minimum contribution required from employers, on top of whatever the salary sacrifice cap has already done to the NIC position.

Neither change is urgent this tax year. Together, they're a strong reason to model pension cost exposure now rather than treat each change as a separate, later problem. An employer who understands both the potential impact of the 2029 salary sacrifice position and their exposure to a wider qualifying earnings base is planning from a position of control, not reacting to two changes in the same scheme within a few years of each other. Crucially, employee communications can start to highlight the salary sacrifice changes as soon as possible so that employees have time to consider them.

Statutory sick pay: a new day-one cost

The Employment Rights Act 2025 removes the Statutory Sick Pay (SSP)earnings floor and makes it payable from day one of absence, rather than after the current waiting period. This lands as a real cost and process change for employers with higher sickness absence or a lower-paid workforce, and it sits squarely alongside group risk and income protection design, not apart from it.

How employers should respond

Reviewing current benefit cost.

Understanding what you spend and why remains the starting point. Salary sacrifice on pensions, cycle to work and electric vehicles still saves NIC below the pension cap threshold, and holiday trading remains a low-cost way to flex reward without touching base pay.

Modelling pension exposure now.

Run the numbers on scheme membership: how many employees sacrifice above £2,000 today, what NIC exposure looks like once the cap lands, and separately, what a wider qualifying earnings band or higher minimum contribution rate would add to employer cost if either reform proceeds. This is a modelling exercise that sits alongside a wider payroll and reward review, not a standalone pensions task. 

Renegotiating and restructuring existing benefits.  

Provider terms, platform fees and consultancy costs are all still worth benchmarking. Where a benefit is becoming unaffordable, restructuring scope or introducing a claims limit is usually preferable to removing it outright, and a total reward statement helps employees understand why.

Tax-free benefits.

Employer-provided homeworking equipment, annual medical screenings, eye tests and flu jabs are now tax and NIC exempt. Small individually, but worth building into the wider tax-efficient benefits conversation alongside trivial benefits and work-related training.

Communication.

Where changes have a long lead time, employers who explain them early, and any resulting design decisions, will manage employee reaction far better than those who leave it until the cost lands.

A cost-effective, future-proofed benefits package

Rising minimum wage and frozen thresholds are now a known, ongoing cost. Pensions are where the next real shift sits, between a confirmed salary sacrifice change and a reform agenda that hasn't landed yet but is already in law. A benefits review in 2026 isn't just about trimming spend. It's the point to test whether pension, payroll and reward design will still work once either or both of these changes take effect, and to have that conversation before the cost lands rather than after.

Get in touch with Laurie Eggleston or Jonathan Berger to talk through what these changes mean for your scheme.