Most UK employers plan to award pay rises in a narrow range of roughly 3 percent to 3.5 percent this year, suggesting wage growth is likely to remain steady despite cooling vacancies and ongoing cost pressures.
New survey data indicates that businesses are balancing staff demands for higher pay against tighter budgets and an uncertain economic outlook. The result is a cautious approach that keeps pay awards above the Bank of England’s comfort zone but below the levels seen at the height of inflation.
Research by Incomes Data Research, a specialist pay and employment consultancy, found that 39 percent of employers are planning increases between 3 percent and 3.49 percent in 2026. A further 22 percent expect to award rises between 3.5 percent and 3.99 percent, while 16 percent are considering settlements between 2.5 percent and 2.99 percent.
Inflation still influencing pay decisions
Employers say higher living costs continue to shape wage discussions, even as inflation has eased from recent peaks.
British inflation reached an 18-month high of 3.8 percent in the third quarter of 2025 before falling back to 3.4 percent by December. The increase was partly driven by one-off rises in regulated prices and changes to employer levies earlier in the year.
Zoe Woolacott, a researcher at Incomes Data Research, said inflation remained a significant concern for businesses.
“Inflation is currently higher than it was a year ago and this has applied upward pressure on pay to some extent and the findings from our poll show that inflation continues to figure relatively highly in employers’ concerns,” she said.
Nearly two thirds of employers told the organisation that inflation would be a key factor in determining the size of their awards this year. At the same time, 96 percent said they would only offer pay increases that were affordable for their business.
The competing pressures of rising prices and financial constraints help explain why most companies expect wage growth to cluster close to 3 percent rather than climb sharply higher.
Stability rather than big increases
Separate analysis from Incomes Data Research shows that many organisations intend to keep pay awards broadly in line with last year.
Forty four percent of employers said they plan to offer the same level of increase in 2026 as they did in 2025. Twenty eight percent expect to give higher awards, and the same proportion anticipate offering less.
Among employers that have yet to make a final decision, the largest share believe a rise between 3 percent and 3.49 percent is most likely.
Overall, the consultancy estimates that the median pay award for the year ahead will be around 3.4 percent, only slightly above the 3.3 percent recorded in 2025. About one in four organisations expect to give increases of 4 percent or more.
These figures are closely watched by the Bank of England, which monitors wage settlements as a guide to future inflation pressures.
Central bank keeping a close eye
Bank of England governor Andrew Bailey has said he expects inflation to fall back close to the 2 percent target in the spring, helped by lower energy prices. But some policymakers remain cautious about the impact of pay growth on prices.
Megan Greene, a member of the Bank’s monetary policy committee, has previously warned that pay rises much above 3 percent could put upward pressure on inflation, particularly given weak productivity growth.
Financial markets expect the Bank to keep interest rates unchanged at 3.75 percent at its upcoming meeting, with the possibility of gradual reductions later in the year if inflation continues to ease.
Figures from the Office for National Statistics show that private-sector pay growth is already slowing. Average earnings excluding bonuses increased by 3.6 percent in the three months to November, down from 3.9 percent in October and the smallest rise since 2020.
Weaker labour market limits bargaining power
The more cautious approach to pay also reflects a softening labour market.
Vacancies and payroll employment have fallen steadily in recent years, reducing workers’ bargaining power. Unemployment has risen to 5.1 percent, a near five-year high, and economists expect it to increase further in the first half of 2026 as higher employment costs weigh on hiring.
Against that backdrop, many employers are reluctant to commit to large permanent pay increases, especially after recent rises in the minimum wage and national insurance contributions.
Nearly a third of businesses surveyed said they would give their staff a lower pay settlement this year than in 2025, highlighting the financial strain some organisations are under.
Balancing expectations and affordability
Employers and finance directors face the challenge of setting pay at a level that supports retention without undermining business viability. Workers continue to seek compensation for higher housing, food and energy costs, but companies are facing their own pressures from taxes, borrowing costs and slower growth.
The result is likely to be another year of modest, tightly controlled wage increases rather than a return to the rapid rises seen in 2023 and early 2024.
Economists say that pattern would be broadly consistent with the Bank of England’s aim of bringing inflation back to target while avoiding a sharp slowdown in the labour market.
With most employers converging around a 3 percent pay award, the coming months are likely to test whether that level is enough to satisfy staff expectations while keeping cost pressures in check.
The survey was conducted in November and December and covered 121 organisations employing a combined total of 2.8 million workers.
