Budget 2026: The Pay Rise Is Confirmed But What Else Do Employers Need to Know?

The Chancellor's Budget was light on new employment law (unsurprising given the Employment Rights Act 2025 tidal wave of changes) but heavy on the practical detail that lands on employers' desks. There was no increase to the headline rates of income tax, National Insurance or VAT, yet several measures will affect pay, payroll and workforce planning over the next 18 months.

National Living Wage and National Minimum Wage

The headline measure for employers is a 3.9% rise in the minimum wage rates from 1 April 2027:

• National Living Wage (21 and over): £12.71 to £13.21 an hour

• 18 to 20-year-olds: £10.85 to £11.27 an hour

• Under 18s and apprentices: £8.00 to £8.31 an hour

Employers should budget now and remember the knock-on effects. Differentials with supervisors, salary sacrifice arrangements that reduce pay and unpaid working time can all create minimum wage risk. With HMRC and the Fair Work Agency naming employers for underpayment, this is worth checking before April, not after.

Parental Pay for the Self-Employed

The Budget confirms that parental pay will be expanded, including to self-employed fathers and partners for the first time. The detail and start date are still awaited. Employers who engage self-employed contractors should watch for any impact on how those arrangements are structured, particularly given the wider scrutiny of employment status.

Payroll and Benefits Changes

Several measures will keep payroll teams busy:

• Mandatory payrolling of benefits is due from April 2027 for company cars, fuel, vans and employer-provided medical benefits, with other benefits following in April 2028

• Mileage rates: the 55p rate for the first 10,000 business miles becomes permanent, and the rate above 10,000 miles rises from 25p to 35p

• Immigration costs: from 28 October 2026, Immigration Skills Charge and Certificate of Sponsorship fees paid by employers are no longer taxable benefits in kind

• Salary sacrifice: the previously announced cap means pension contributions above £2,000 a year lose their National Insurance exemption from April 2029

Employers with salary sacrifice schemes should model the longer-term cost and review how any change would be communicated to staff.

Young People and Skills

The Budget includes a Jobs Guarantee for eligible 18 to 24-year-olds on Universal Credit, £100 million for local apprenticeship services and a youth employment White Paper due early next year. Employers recruiting young workers should look at the incentives available, while making sure that recruitment, probation and supervision are properly managed.

A SLOWER Labour Market

The forecast shows unemployment rising to 5.1% in the second quarter of 2027. In a softer market, we typically see more restructures, more redundancy exercises and more disputes. Government plans to cut administrative burdens on business and establish a Better Regulation Executive will be welcomed, but they do not change the legal duties arriving under the Employment Rights Act 2025.

Non-Compete Clauses: Reform Is Coming

The most significant employment law signal in the Budget was on non-compete clauses. On 9 October 2026, the Prime Minister announced that the government will legislate to restrict them, saying some businesses had "gone too far" in their use of restrictive practices. The Budget has now confirmed the commitment, stating that non-competes will no longer be a barrier to hiring for start-ups and scaling firms and that the reforms will apply across the whole economy, not only to the technology sector.

What we know:

• The government intends to legislate, so primary legislation will be needed

• The reform is not limited to start-ups. The government wants to stop workers in the "everyday economy" being held back from changing jobs

• The government will consult shortly on the wider use of restrictive practices, which could extend to notice periods, garden leave and other post-termination restrictions, and a detailed position is expected in early 2027

What we do not yet know:

• Whether there will be an outright ban, a statutory cap on duration, a salary threshold, or a requirement to pay employees during the restricted period

• Whether existing clauses will be caught

• When any change will take effect

Under current law there is no statutory limit on the length of a non-compete, no salary threshold and no requirement to pay for the restricted period. They remain enforceable only where they protect a legitimate business interest and go no further than reasonably necessary. Previous governments have proposed reform, including a three-month cap in 2023, but nothing was enacted, so this announcement should be taken seriously but not assumed to be imminent.

Do Not Forget the Legal Deadlines

The Budget sits alongside a busy run of employment law changes:

• 30 October 2026: the "all reasonable steps" duty to prevent harassment, including by third parties - have you carried out your risk assessment and bespoke training yet?

• 1 January 2027: unfair dismissal protection after six months' service, with the compensation cap removed - it's the big headline change.

• March 2027: the fire and rehire restrictions.

The Prime Minister has also announced plans to legislate on non-compete clauses, although the detail is still to come and we will report on it when it does.

What Employers Should Do Now

Cost the minimum wage rise and check pay structures and differentials before April.

Review payroll readiness for mandatory benefit payrolling.

Audit contractor arrangements in light of the self-employed parental pay expansion.

Plan for a harder market. Restructures need proper consultation and processes.

Keep up with the Employment Rights Act timetable, because the legal costs of getting it wrong are rising.

Impact

Impact Employment Law helps employers turn the Budget into a practical plan. We can review contracts, pay structures and salary sacrifice arrangements, advise on redundancy and restructuring, carry out an Employment Rights Act health check, and deliver training on the new harassment duties and unfair dismissal changes. Speak to us early and we will help you plan ahead.

Contact Oliver Tasker: 📞 Call: 01522 776270 ✉️ Email: oliver@impactemploymentlaw.co.uk

Advice. Protection. Impact.