With the National Minimum Wage and the National Living Wage usually increasing each year, many business owners are naturally considering their options.
From April 2026 the hourly rate for over-21s will rise by 50p to £12.71, with workers aged 18-20 seeing an 85p rise to £10.85, and under-18s and apprentices getting 45p more – going up to £8.00 an hour.
While these changes are undoubtedly positive for employees, leading to a better work environment – they can put a strain on small businesses with tight profit margins, significantly increasing their expenses.
In this article, we’ll explain the key differences between the National Minimum Wage and the National Living Wage and also look at some strategies to help you cope with employment costs in your business.
What is the National Minimum Wage?
The National Minimum Wage is the legal minimum rate of pay UK employers must pay most workers. It applies from the compulsory school leaving age and is set at different levels depending on age and employment status, including apprentices.
Employers are legally required to ensure eligible staff are paid at least the applicable minimum wage rate for their category of work.
The specific rate a worker is entitled to depends on their age group and whether they are an apprentice or not.
What is the National Living Wage?
The National Living Wage is the highest rate within the UK minimum wage system. Despite its name, it’s not directly linked to the actual cost of living. Instead, it’s set as a proportion of median earnings across the UK workforce.
The National Living Wage currently applies to workers aged 21 and over, but it doesn’t apply to those in the first year of an apprenticeship.
Minimum wage vs National Living Wage
In short, you have to pay workers at least the National Minimum Wage or the National Living Wage.
How do you know which one, though?
Again, it depends on the age of the employee and whether they are an apprentice (as different age bands apply). This article explains the differences and what rate applies in more detail.
There’s also the Living Wage (or Real Living Wage) to be aware of. Not to be confused with the National Living Wage, this is voluntary and based on the actual cost of living at the time, reflecting what people need to cover the essentials.
Around 16,000+ UK employers are currently accredited as Real Living Wage employers, benefitting over 490,000 employees. It also benefits businesses too – with 94% of accredited employers stating this.
How are small businesses affected?
A minimum wage rise often hits small businesses first through higher labour costs. Even a small hourly increase quickly adds up, pushing up monthly overheads.
For example, a café with six staff working 30 hours a week would pay about £90 more weekly after a 50p per hour rise – that’s nearly £4,700 a year before extra costs like National Insurance and pensions going through PAYE. For businesses with tight margins, that can make the difference between making a profit or a loss.
Labour-heavy sectors like hospitality, retail, and care feel it most. Businesses may cut overtime, rethink staffing during quiet periods, or raise prices. Over time, the pressure can also affect hiring plans, expansion, and overall growth.
What can small businesses do to adapt?
Like any external factor affecting your small business, identifying issues and adapting to them early on can create more breathing room.
Restructuring is perhaps the most obvious approach, and this involves things like consolidating roles and streamlining processes in an attempt to cut back on spending. It’s not always the most appropriate course of action though, especially if the type of work you’re involved in demands a minimum number of staff on duty.
Alternatively, you could consider outsourcing, which is where you delegate certain tasks to professionals outside the business (e.g. freelancers or an agency). This approach could even be paired with the introduction of new automations to help offset the impact of increased labour costs.
Are there other ways to save money?
Thankfully, there are!
Some employers can use the Employment Allowance to reduce their National Insurance bill by £10,500 each year.
In order to qualify, you need to have at least one employee earning more than the £5,000 Secondary Threshold for National Insurance (or at least 2 directors if you don’t have any employees).
What’s more, you don’t need to be paying more than £10,500 to qualify, either.
If you’re unsure about any of this, an accountant can walk you through the process and also ensure you’re operating in the most tax-efficient way possible, and claiming everything you’re entitled to.
Find more help in our online accounting hub, and learn more about how to find the right accountant for your business.
