Rising Payroll Costs in 2026: What Employers Need to Know

Payroll Costs Have Changed Materially

The minimum wage 2026 UK increase is one of the largest employers have faced in recent years. But wages are only one part of a much wider shift in employment costs.

Most business owners knew wage and National Insurance increases were coming. What many are now seeing for the first time is what those changes actually look like when they hit a live monthly payroll.

For SMEs across Reading, Bracknell and Berkshire, the combined effect is significant. A business employing five or ten staff may now be facing thousands of pounds in additional annual costs once wages, employer NI, pension contributions and statutory payments are added together.

Payroll deserves far closer attention in 2026/27 than it did even two or three years ago.

Across Reading, Bracknell and Berkshire, SMEs are reviewing staffing structures, remuneration planning and payroll systems in response to rising employment costs and tighter margins.

The Minimum Wage Increase: What It Means in Practice

The new National Living Wage and National Minimum Wage rates from April 2026 are:

Payroll costs compound quickly across an entire workforce once employer NI, pensions, overtime and holiday pay are included.

A small hospitality business employing five full-time staff previously paying £11.44 per hour is now likely to face:

• around £1,950 additional annual wage cost per employee
• close to £10,000 additional annual wage cost overall

before wider employment costs are factored in.

For businesses employing ten or fifteen staff, the increase scales rapidly. Retailers, cafés, trades businesses, care providers and service firms are particularly exposed because staffing costs already represent a large proportion of operating overheads.

HMRC enforcement around minimum wage compliance has also become increasingly robust. Payroll errors, incorrect deductions, or outdated software settings can all create problems, even where underpayment is accidental.

Employer National Insurance: The Other Major Cost Increase

Alongside wage increases, employer National Insurance changed significantly from April 2026.

The employer NI rate increased from 13.8% to 15%, while the secondary threshold reduced from £9,100 to £5,000 annually. Employers now begin paying NI earlier on employee earnings and across a larger proportion of payroll.

This affects businesses with:

• part-time staff
• mixed-hour workforces
• operational teams
• lower-paid or seasonal employees

particularly strongly.

A typical Berkshire SME employing a mixture of full-time and part-time staff could easily see several thousand pounds in additional employer NI costs this year compared to 2025/26.

Wage increases, pension contributions, statutory payments and employer NI changes are now landing simultaneously for many SMEs. Payroll forecasting has therefore become much more important this year. Even relatively small changes in staffing structure, overtime patterns or remuneration planning can make a noticeable difference across a full financial year.

The Employment Allowance: What It Is and How Businesses Claim It

One of the most valuable reliefs available to small employers remains the Employment Allowance.

For 2026/27, eligible businesses can reduce their employer NI bill by up to £10,500 annually. The previous £100,000 eligibility cap has also been removed, meaning more SMEs may now qualify.

In practical terms, the allowance reduces the amount of employer National Insurance a business pays to HMRC through payroll.

Many limited companies, charities and businesses with employees qualify, although companies where the director is the only employee generally do not.

Businesses can usually check eligibility by:

• reviewing HMRC guidance
• speaking with their accountant or payroll provider
• checking whether the allowance has already been activated within payroll software

Claiming the allowance is normally straightforward and is done through PAYE payroll software. Once activated, the reduction is applied automatically against the employer NI bill during the tax year.

At Edmonds, we regularly see businesses that:

• assume they are not eligible
• forget to reactivate the claim after changing payroll systems
• or never realise the allowance exists at all

For many SMEs, the saving is meaningful enough to offset a significant proportion of the recent employer NI increases.

Other Payroll Costs Employers Should Be Aware Of

Wages and employer NI are the biggest payroll headlines in 2026, but they are not the only changes affecting SMEs this year.

Updated rates also apply to:

• Statutory Sick Pay (SSP)
• Statutory Maternity Pay (SMP)
• Statutory Paternity Pay (SPP)

While the government allows many employers to reclaim a proportion of statutory payments, businesses are still responsible for administering them through payroll and managing the wider operational impact.

For smaller employers especially, extended sickness, maternity or paternity leave can create additional costs through:

• temporary staff cover
• overtime
• onboarding and training
• operational disruption
• cashflow timing

HMRC also continues moving towards mandatory payrolling of benefits in kind, gradually shifting benefits reporting away from year-end P11D forms and into real-time payroll processing.

For growing businesses, payroll is becoming increasingly digital, regulated and interconnected with wider financial reporting.

Salary is now only one component of the wider cost of employing staff.

Why More SMEs Are Reviewing Remuneration Strategy

The 2026 payroll changes are also prompting many owner-managed businesses to revisit remuneration planning more broadly.

Historically, relatively standard salary-and-dividend structures worked well for many directors. With higher employer NI, increased dividend tax rates, pension planning opportunities and changes to payroll reporting, many SMEs are now reassessing whether their existing structure remains the most efficient.

HMRC’s reporting environment has also become much more real time. Payroll reporting through RTI, tighter oversight of director loan accounts, and the gradual move toward payrolling benefits means businesses have far less flexibility to tidy things up retrospectively than they did historically.

Many directors previously relied on year-end adjustments to reconcile drawings, dividends or director loans. That approach is becoming increasingly risky from both a tax and compliance perspective.

In many cases, modest adjustments around pension contributions, salary sacrifice arrangements or director remuneration timing can improve long-term efficiency significantly.

Businesses reviewing these decisions early in the tax year generally have far greater flexibility than those leaving planning until March.

Practical Steps Employers Should Take Now

For most SMEs, the sensible approach is steady review and tighter visibility over payroll costs.

Areas worth checking now include:

• payroll software updates and thresholds
• Employment Allowance eligibility
• staffing budgets and forecasts
• pension contribution settings
• salary sacrifice arrangements
• benefits reporting
• director remuneration structures

Businesses still managing payroll manually or through fragmented systems may also want to review whether outsourcing payroll would reduce risk and save management time.

As payroll compliance becomes more complex, relatively small administrative errors are becoming increasingly expensive.

How Edmonds Helps Small Employers Across Berkshire

At Edmonds Accountancy, we support SMEs across Reading, Bracknell and Berkshire with:

• managed payroll services
• Employment Allowance reviews
• remuneration planning
• payroll forecasting
• bookkeeping integration
• pension and salary sacrifice guidance

Most importantly, we help business owners understand how payroll changes affect wider business planning, profitability and cashflow.

Relevant services and guidance:

• Edmonds Payroll Services
• What UK SMEs Need to Know After the Autumn Budget 2025
• Edmonds Bookkeeping Services

Rising Payroll Costs Require Planning and Visibility

Employing staff became materially more expensive in 2026. Most SMEs are already feeling that pressure in some form.

Many SMEs are responding by improving visibility, tightening payroll processes, reviewing remuneration structures properly, and forecasting costs earlier.

Small adjustments made consistently across the year often have a far greater impact than reactive decisions made under pressure later on.

Speak to the team at Edmonds Accountancy for straightforward payroll advice tailored to your business in Reading or Bracknell.