Need to know:
- Increases in employer national insurance contributions and the national living wage mean employers have less money to spend on pay rises.
- Benefits costs have also risen, with healthcare costs set to increase by 10.6% and some organisations seeing premiums rise by 60%.
- In response, employers are targeting pay rises at particular groups and seeking benefits that deliver significant impact at lower costs.
The rising cost of pay and other benefits is causing headaches for employers. The increase in employer national insurance contributions (NICs) announced in the Autumn 2024 Budget came into effect in April 2025, with payments rising from 13.8% to 15% and the threshold on which this is payable dropping from salaries of £9,100 to £5,000.
Alongside this, the national living wage will rise to £12.71 per hour from April 2026, while statutory sick pay, which is currently payable from day four of sickness, will be payable from day one from the same date, further adding to the cost of employing people.
Small budgets for pay rises
Inevitably, this is restricting the amount of money that is available for pay rises, with most employers planning moderate increases. Holly Coe, a senior reward consultant at Innecto, says: “At our Pay Trends event in January, most HR and reward leaders reported awarding around 3% in 2025, and this looks set to continue; not because this level is optimal, but because it’s what budgets allow.”
There is little sign that pressures will ease any time soon. Jackie Witcher, head of employee benefits at Menzies, says: “Pay awards in 2026 are expected to be more moderate than in recent years, but still above long-term averages for many employers. Decisions are being shaped by affordability, labour market pressures in key roles and the need to balance retention with cost control.”
Impact on recruitment and retention
Businesses are targeting their limited resources at critical or hard-to-fill roles where market pressures remain acute, as well as lower-paid workers and those in retention hotspots, where the cost of high levels of staff turnover is greater than pay adjustments, says Coe. “One-off, non-consolidated payments are increasingly used to manage short-term pressures without locking in long-term, fixed pay costs,” she adds.
Data from recruitment firm Robert Half’s 2026 UK salary guide, published in December 2025, found employers are looking at alternatives in a bid to attract and retain talent. Remi Gay, senior talent manager at Robert Half, says: “Employers are increasingly offering benefits such as flexible-working arrangements (74%), annual performance bonuses (71%), professional development opportunities (68%) and additional paid time off (57%) when unable to offer a candidate a salary within their expected range. This suggests that [employers] are trying to balance cost pressures with employee expectations by leaning more strategically on non-salary benefits.”
Rising costs of healthcare benefits
But rising costs have also impacted benefits, particularly in the wellbeing space, with the UK expected to see an increase in healthcare costs of 10.6% in 2026, according to Willis Towers Watson’s 2026 Global medical trends report, published in November 2025. “Premiums for private medical insurance (PMI), group risk benefits and broader wellbeing provision have risen by well above general inflation, driven by increased claims, long-term sickness trends and growing demand for mental health and musculoskeletal support,” says Coe. “Organisations are also facing higher per-employee costs for insurance, rehabilitation and everyday health support.”
Some employers have been quoted increases of as much as 60% on premiums for private medical insurance, while other wellbeing-related benefits are also more expensive, says Luke Bullen, VP of UK and Ireland at Wellhub,. “Employee assistance programme (EAP) costs have risen due to higher usage as people find it harder to find mental health support via the NHS, and physical health benefits, such as gym memberships, have become more expensive as providers pass on higher operating costs,” he says. “However, these increases are modest compared to the scale of pressure on private medical insurance.”
Mark Hamson, managing director of insurance at Westfield Health, says his organisation is seeing a clear trend in renewal conversations. “Low-cost, high-use benefits are staying; health cash plans and virtual GP access remain because employees use them regularly and costs are manageable,” he says. “These cover everyday health essentials like dental appointments, physiotherapy and optical care.
“Traditional PMI is being reconsidered. Some employers are restricting PMI to senior staff only. Others are moving to access-only models where employees pay their own premiums. We’re seeing more employers choosing private health insurance which covers everyday health and wellbeing without the full cost of comprehensive PMI. Beyond healthcare benefits, we’re hearing that income protection, enhanced sick pay, training budgets and team events are often first to go when budgets are tight.”
Re-evaluation of benefits approach
When it comes to wider benefits, employers are having to re-evaluate what they provide. James Gozney, chief executive officer (CEO) and founder of Aslan, says: “Benefits now need to earn their place. Those that are cost-neutral, cost-negative or act as genuine force multipliers are much easier for HR teams to defend internally. Those that are perceived as too narrow or nice-to-haves without clear outcomes are increasingly difficult to justify.”
But employers are also thinking more strategically, as they seek to engage employees without incurring significant costs. “Employers are placing greater emphasis on high-impact, lower-cost benefits such as flexible working, wellbeing support, financial education and salary sacrifice schemes,” says Witcher. “Clear communication is also helping to increase perceived value without increasing spend.”
Coe also highlights the move towards more affordable benefits that still deliver value to employees, including discount and lifestyle platforms and career development opportunities such as mentoring and progression pathways. Salary sacrifice arrangements on pensions, cars and technology can help employees access items they otherwise would not have been able to afford, while flexible benefits platforms can give people choice over which benefits they use without increasing spend. “These options enhance the employee experience while protecting budgets,” she says.
One benefit employers should avoid touching is pensions, says Matt Russell, CEO at Epassi UK. The firm’s own research, published in January 2026, found pension contributions are the most desired benefit for 2026. “Employees are clearly seeking more support and security around how they can comfortably save for retirement,” he says. “While some businesses may begin to pull back on this type of benefit to save on costs, leaders that maintain this perk could place themselves at a competitive advantage.”
Differentiation opportunities
Robert Half’s survey also hints at a benefit that employers could do more with, suggesting 80% of workers would accept more paid time off where a pay rise is not possible. “This is significantly higher than the share of employers that offer it (57%),” says Gay. “This gap is likely to influence future pay and benefits strategies, as employers face growing pressure to better align reward packages with what employees actually value in order to stay competitive.”
It is this kind of more considered approach that will allow employers to engage and retain staff, even in the wake of intense pressures on costs. “Rather than cutting across the board, employers will look closely at what’s actually being used and what is delivering impact,” predicts Bullen. “Rather than a race to the bottom, the shift will be towards smarter, more intentional benefit strategies, giving employers a real opportunity to differentiate themselves.”
