National Living Wage Set for Another Rise: How Employers Should Prepare Their Payroll

November saw Chancellor Rachel Reeves deliver her Autumn budget, announcing an increase to the National Living Wage among other key changes surrounding tax contributions and savings. 

The current National Living Wage is £12.21 but is set to rise to £12.71 from April 2026.

The Minimum wage for 18-21 year olds will rise to £10.85, and the minimum wage for 16-17 year olds & apprentices will rise to £8.00.

It is estimated that 2.4 million employees will be affected by these changes, so employers will need to make sure their payroll is updated and prepared for roll-out before the effective date.

Failure to update payroll systems, hourly rates and other calculations in line with the new rates can immediately lead to a breach in employment law.

Any breach of employment law can lead to backdated pay to affected employees, financial penalties, and damage to reputation with staff and the business world.

These breaches can be caused by common issues within the way a company handles its payroll. If rate changes aren’t applied consistently across the pay structure, or overtime and TOIL calculations still reference old base rates, these might not be caught before it’s too late.

Rather than being caught out, employers should be preparing now. Here are some suggestions to help you adapt to the National Living Wage hikes in a frictionless way:

Audit Existing Pay

One of the first things employers should do is look at their existing data. It will be important to identify who will be affected by these coming changes directly. 

This will need to account for age thresholds, those on apprenticeships and part-time and irregular hours workers. In these situations, it’s always best to double-check that you account for everyone, rather than work on assumptions.

By identifying those that will be affected early, and marking them for the changes, you can ensure the accuracy of your payroll, as well as create checklists for full compliance once the change has been made.

Update Payroll System 

Rather than wait until April and rush to finish preparation before the deadline, it is best to pre-load the changes as soon as possible and prevent first pay-cycle errors and avoid disputes. 

This would also be a good time to check and pre-load changes in premium hours pay, such as overtime or premium/holiday pay. These can be easily overlooked, or the assumption that they are automatically updated might prevent checking.

Utilising an automated payroll platform like Access Paycircle, it’s possible for factors like compliance with new taxation laws to update instantly, allowing more flexibility in managing new National Living Wage considerations. 

This is a key step, and the ahead-of-time testing for the alternative pay bands helps make sure that any nasty surprises are found before they become an issue.

Communicate Changes Internally 

Although not a legal requirement, it is a good idea to have clear communication with the staff and explain the changes that may affect their pay increase. 

It is up to the business to decide if they will update everyone, or just those affected, but failure to explain this clearly can lead to confusion and payroll disputes that can consume time that could be spent more productively.

Any communication should address the rise and state the new rates clearly, and remind them that they can discuss the changes with the company if they need more advice or information.

This can help boost employee satisfaction and they can have confidence that the business is taking care of them.

Simulate Payroll Runs 

Once the changes have been identified and logged, businesses should try to do a test run before the effective date. HR teams can take advantage of software that will allow them to do a draft payroll run before the changes take place, including checking overtime, holiday or other premium rates.

Doing this will ensure that any issues are found before they are implemented, and gives the business a chance to catch and fix any issues before they can affect the staff.

Direct wage increases are just the first aspect of this change; an increase in the minimum wages can lead to a ripple effect through the payroll, and this is worth considering now, too.

With the National Living Wage increasing, this has the potential to narrow gaps with experienced staff and could lead to dissatisfaction with those feeling unseen. It is important to take the chance to review each pay band and think proactively about this, and consider slight adjustments to help keep equity across the staff.

Long-Term Workforce Decisions

An increase in minimum wages can also affect new hire costs and can cause a business to ask themselves whether new roles are essential. With this in mind, it's also a good opportunity to review company retention efforts and make sure that you are offering a workplace that people want to stay in, as stability becomes a financial asset.

Wage increases are predictable, and actioning them is a legal responsibility. Businesses should manage them proactively. An effective payroll platform saves time and reduces the risks of mistakes made during the updating process. 

Employers who prepare early reduce the stress and burden on their staff, and can have confidence that no matter what lies ahead, they will be ready.