Payroll Costs and Pricing in Summer 2026: How SMEs Can Protect Margins After Wage Rises
If your payroll bill has increased this year, the reasons are clear. From 1 April 2026, the National Living Wage rose by 4.1% to £12.71 an hour for workers aged 21 and over. The rate for workers aged 18 to 20 increased by 8.5% to £10.85, while the under-18 and apprentice rates rose to £8.00.
Employer National Insurance remained at 15% from 6 April 2026, with the standard Secondary Threshold fixed at £5,000 a year. The combined effect is higher employment costs.
What changed in 2026/27?
| Cost driver | 2025/26 | 2026/27 |
|---|---|---|
| National Living Wage, age 21 and over | £12.21 an hour | £12.71 an hour |
| National Minimum Wage, age 18 to 20 | £10.00 an hour | £10.85 an hour |
| Under-18 and apprentice rate | £7.55 an hour | £8.00 an hour |
| Employer National Insurance rate | 15% | 15% |
| Standard Secondary Threshold | £5,000 | £5,000 |
| Employment Allowance | £10,500 | £10,500 |
The apprentice rate applies to apprentices under 19 and those aged 19 or over in the first year of their apprenticeship. After that, an apprentice aged 19 or over must receive the minimum wage for their age.
The real cost of the wage increase
Consider an employee aged 21 or over who works 40 hours a week for 52 weeks. Their annual gross pay rises from £25,396.80 to £26,436.80, an increase of £1,040.
Assuming standard employer National Insurance and the statutory minimum employer pension contribution of 3% on qualifying earnings, the illustrative annual cost rises from approximately £29,031.02 to £30,258.22. That is an increase of about £1,227.20, comprising £1,040 in wages, £156 in employer National Insurance and £31.20 in employer pension contributions.
Actual costs can differ because of Employment Allowance, pension scheme rules, bonuses, irregular hours and special National Insurance categories.
Need Expert Accounting Advice?
If you are unsure about tax, bookkeeping, payroll, property accounts or business finances, speak to the team at FHP Accounting for clear, practical guidance.
Reliefs worth checking before changing prices
Eligible employers can reduce their annual employer Class 1 National Insurance liability by up to £10,500 through the Employment Allowance. The previous £100,000 eligibility cap was removed in April 2025.
The allowance is not available in every case. A limited company cannot normally claim where its sole director is the only employee liable for employer National Insurance. Connected companies can generally claim only one allowance between them.
Employers may also pay 0% employer National Insurance on earnings up to £50,270 for employees under 21 and qualifying apprentices under 25. The normal 15% rate applies above that threshold.
Should you raise prices?
A blanket increase may not be the best response. Calculate the extra payroll cost for each role and relate it to billable hours, products, contracts or customer groups. You can then decide whether to improve productivity, adjust staffing, reduce another cost or pass on part of the increase.
Using outsourced finance and accounting support can make this analysis more reliable. An outsourced finance function can model wages, employer National Insurance, pensions and statutory payments alongside revenue and gross margin.
Practical steps for summer 2026
Review employee ages, apprentice status, contracted hours and payroll categories. Check that the Employment Allowance has been claimed through payroll software for 2026/27. Eligible businesses may also claim for the previous 4 tax years, but any refund is limited by the employer National Insurance liability and allowance available in each year.
Outsourced Xero bookkeeping services can help keep payroll and accounting records reconciled. The guide on migrating from spreadsheets to Xero may also be useful.
Further guidance includes employers’ National Insurance increases explained, month end in Xero and why accurate bookkeeping matters for business success.
Frequently asked questions
Has the Employment Allowance changed for 2026/27?
No. The maximum remains £10,500, although eligibility and connected-company rules still apply.
Will the National Living Wage rise again in April 2027?
The rate has not been confirmed. The Low Pay Commission’s initial estimate is £13.18, within a projected range of £13.02 to £13.34. The final recommendation may differ.
Get your payroll costs under control
FHP Accounting can help you model payroll costs and make pricing decisions using accurate forecasts. Get in touch with our team or book a free consultation to discuss your options.
I lead FHP Accounting, an accountancy practice specialising in Commercial and Residential Property Accounting. Our goal is to make the administration of running property portfolios easier for landlords, managers, and investors — allowing you to focus on what you do best, while we take care of everything behind the scenes.
Need Expert Accounting Advice?
If you are unsure about tax, bookkeeping, payroll, property accounts or business finances, speak to the team at FHP Accounting for clear, practical guidance.
