How an increase to National Minimum Wage has affected benefits

The National Minimum Wage has risen significantly in the past five years so what has the impact been on reward strategies?

The National Minimum Wages (NMW) faces an uncertain future with growing concern about wider labour market challenges facing younger workers and increasingly unpredictable variables such as AI affecting the planning of pay budgets.

The National Minimum Wage (NMW) was first introduced in 1999 at £3.60 per hour for workers aged 22 and over. In 2016, the National Living Wage (NLW) was introduced alongside it, applying to workers aged 25 and over. Since then, the NLW age threshold has gradually lowered, with the NMW applying to workers aged 18 to 20 since 2024.

The NMW has historically been positioned as a development rate, kept lower than the NLW to reflect the typical experience and skill levels of younger workers who are new to the workforce. It also allowed organisations to offset the investment required to develop and train younger workers with lower wage costs, reducing the risk that younger workers would be overlooked in favour of older, more experienced staff.

Recent increases in the NMW

This structure has shifted significantly in recent years. There has been a gradual move towards equalising the NMW and NLW, with the Labour government including an acceleration of this and a commitment to remove the age bands completely in their 2024 manifesto. Since 2021, the NMW has risen by 65%, compared to a 43% increase to the NLW over the same period, and from April 2026 it will rise by 8.5% to £10.85 per hour.

Growing concern about the wider labour market challenges facing younger workers has contributed to reports that the government may slow the pace of equalising the NMW and NLW. Nevertheless, expectations remain that the NMW will still converge with the NLW over time, though potentially over a longer timeframe.

With this shifting landscape in mind, what challenges have employers faced because of these increases, and how have they managed them?

Mitigating increased employment costs

The most immediate impact of rising NMW rates has been the pressure placed on overall employment costs, prompting employers to reassess how entry-level roles are structured and funded.

In some cases, the increased costs can be passed on to customers, but where this is not possible or practical, some employers are instead reducing the size of their workforce or investing in AI technology to replace or reduce the entry-level roles most often paid at NMW levels.

One example of this is the increasing use of AI agents in call centres as a replacement for human workers, raising concerns that the opportunity for staff to develop in these early-career roles is being lost.

These shifts have required reward teams to work more closely with finance and operations to model affordability, redesign entry-level roles, and ensure pay structures remain sustainable.

Addressing pay structure compression

Another way employers have managed NMW increases has been to hold overall pay review budgets steady while diverting a larger share towards employees at NMW and NLW levels. This has limited short-term cost growth but contributed to growing pay compression over time.

It has become increasingly difficult for employers to use pay to differentiate between the levels of experience and skill in junior roles. Many have also struggled to maintain meaningful differentials for supervisors and team leaders, whose pay has been overtaken or compressed by repeated increases to the NMW.

To tackle this, many employers have reviewed their grade and pay structures, considered combining existing roles into fewer higher skilled roles with broader responsibilities, and highlighted career progression routes to show future pay opportunities. Others have differentiated roles through non-pay elements such as guaranteed hours, development commitments, or enhanced flexibility.

Making use of apprenticeship schemes

Many employers are using apprenticeship schemes to reintroduce progression and differentiate entry-level roles, particularly where pay differentials have narrowed. The government-set apprentice rate has also risen rapidly (increasing by more than 50% since 2021), reducing some of the cost advantage of this route.

Even so, apprenticeships remain a valuable way to support structured development and upskilling for younger workers.

Strengthening pay planning and forecasting

Planning pay budgets has become increasingly challenging when NMW rate increases feel unpredictable, with limited notice before changes take effect. Many employers now model multiple scenarios each year, considering inflation forecasts and government ambitions. The days of allocating the same wage increase budget every year are behind us.

Reviewing compliance

In recent years, many employers have reviewed their working time and salary sacrifice arrangements. Non-compliance with the NMW (even if unintentional) carries high financial penalties and reputational risk, so it is worth investing time in a thorough review to ensure payroll records are accurate and compliant.

Conclusion

The most effective reward strategies will be those that acknowledge the uncertain future of the NMW, ensure legal compliance, and embrace opportunities to continue to upskill and develop younger workers - even as pay structures continue to evolve.