What successive National Living Wage rises mean for your pay strategy

Could the rise in NLW present a strategic risk to retention and productivity for reward leaders?

The new National Living Wage (NLW) rate is set for implementation in April, and its impact will be far-reaching.

An estimated 2.4 million employees will benefit, with full-time workers seeing an annual uplift of over £900. While the 4.1% rise for those aged over 21 might seem like a modest increase compared to recent years, zoom out and the bigger picture tells a different story: from £8.91 in April 2021 to £12.71 in April 2026, we’re talking a significant 42.8% increase over five years.

That’s not just a pay rise - it’s a salary shift which is generally not matched by other levels of roles within the majority of wage structures.

Economic context: navigating curveballs

Let’s face it, the past few years have been extremely challenging in relation to pay decisions. Between the pandemic and the aftershocks of elevated inflation, salary structures are feeling the squeeze, and many are creaking under the pressure.

The NLW uplift is, quite rightly, essential for supporting a decent standard of living, but its ripple effects extend far beyond minimum wage earners. Suddenly, those just above the threshold are asking, “What about me?” - and the differential in salary between NLW roles and those that sit above them is becoming a huge challenge for many organisations.

Pay compression: a strategic risk

NLW increases can narrow the gap between entry-level and supervisory roles, leading to pay compression. That means your higher level skilled workers and supervisors might start wondering if their extra effort is worth it, risking disengagement.

For reward leaders, this is not just an operational challenge - it’s a strategic risk to retention and productivity.

To keep employees motivated and feeling valued, proactive management is essential. Consider these actions as parts of your strategic toolkit:

Regular salary structure reviews to identify compression early
Open, transparent conversations to manage expectations and reinforce value
Smart adjustments to maintain meaningful differentials

Ripple effect: structural consequences

Raise the floor, and the whole building shifts. Adjustments at the bottom can trigger a chain reaction up the pay salary structure. Although quick fixes might patch things up in the short term, beware - you could be pushing compression up the ladder.

The imperative is clear: take a holistic approach and move from reactive adjustments to strategic workforce planning, balancing fairness, affordability, and keeping those differentials meaningful.

Budgetary pressures: balancing cost and competitiveness

The NLW increase means higher payroll costs, alongside greater spend on employment on-costs such as pension contributions and NI payments.

For sectors running on tight margins, these changes can feel like a game of financial Jenga. Staffing, pricing, and investment - everything’s up for review and taking decisions on pay differentials are an essential part of a balanced reward strategy that safeguards both affordability and competitiveness.

Talent attraction and retention: beyond pay

Failure to address salary compression risks undermining your Employer Value Proposition. If pay structures don’t keep up, attracting and retaining talent becomes much more difficult.

Even in a slow job market, competitive pay is non-negotiable. However, salary alone won’t win the talent war - leaders must leverage career pathways, benefits enhancements, and clear communication to sustain motivation, engagement and loyalty.

Strategic recommendations

Review salary structures regularly - spot compression before it bites
Model pay frameworks that are legislatively compliant, equitable, and fair
Balance affordability with competitive pay gaps
Plan ahead - integrate NLW changes into long-term workforce planning
Broaden the reward narrative - emphasise non-monetary levers

The NLW challenge - and opportunity

The NLW increase has been significant over the past few years and whilst the forthcoming rise is smaller in relative terms to recent years, the salary differential in pay structures is shrinking.

For HR and reward leaders, the challenge is to navigate compression, manage cost pressures, and keep talent engaged - all while maintaining fairness and compliance.

With smart planning, transparent communication, and a focus on both monetary and non-monetary rewards, you can turn these challenges into opportunities while strengthening you EVP and reinforcing organisational resilience.

The reality for employers is that proactive, flexible pay strategies are no longer optional - they are essential for navigating volatility and safeguarding competitiveness. In today’s evolving reward landscape, adaptability is not just a best practice - it’s a business imperative.