If you're a small business owner or manager heading into pay review season, you’re not alone in feeling the pressure. Balancing fairness, market expectations and affordability isn’t easy especially after the last few years.

So here’s The Little HR Department’s practical guide to help you make confident, informed decisions about pay increases in 2026.

What’s Going On With Pay Right Now?

After a few bumpy years of high inflation and rising wage demands, employers are heading into 2026 with a continued level of uncertainty, but a hope that things like inflation will ease, and there will be greater economic stability.

Inflation is predicted to ease, but slowly. Employees are still feeling the cost-of-living pinch, and small businesses are caught between wanting to reward people and needing to protect cashflow.

Wages jumped sharply across 2023 and 2024, but even those increases didn’t keep up with rising costs. By late 2024 and through 2025, things finally started to level out. But with CPI (consumer goods and services) still at 3.8% in September 2025 (and NI increases now in play), pay reviews remain a tricky balancing act.

Recruitment has softened, unemployment is up slightly, and employers are generally more cautious. Still, many expect to maintain or grow headcount, just with tighter budgets than before.

Based on current market commentary and trends, many smaller organisations are planning pay rises of around 3% for early 2026. This may be lower for those who do pay increases later in the year, as the predictions are for inflation to decrease, but currently it's hard to say anything with certainty when looking ahead in the medium to long term.

But ultimately, the “right” decision depends on what’s fair, sensible and sustainable for your business. Below is a simple breakdown of the main things to consider:

What Should You Think About When Setting Pay Increases?

1. Inflation: What’s Changed and Why It Matters

Inflation shows how much prices have risen. The key numbers:

• CPI (everyday basics): 3.8%
• CPIH (includes housing costs): 4.1%

The Bank of England expects this to fall slowly towards 2.7% in late 2026.
Inflation isn’t spiralling anymore, but it’s still higher than many employers would like.

2. What Other Employers Are Doing

• Regular pay rose 7% in summer 2025 (ONS).
• Market reports that salary budgets for 2026 are expected to sit between 3% and 3.6%, although 3% seems to being talked about more as we get closer to the end of the year.

Recruitment has calmed down after years of a candidate-driven market, which helps keep wage inflation lower. But remember replacing a good person often costs far more than paying them fairly in the first place.

3. Fairness Inside Your Organisation

Before setting increases, check:

• Are similar roles paid fairly compared to each other?
• Can any differences be explained clearly and objectively?
• Do percentage increases make sense across the team?

People don’t need everyone to be paid the same, they just need to see that decisions are fair and make sense.

4. Affordability: What Can You Actually Sustain?

For many SMEs, this is the biggest factor.

A modest increase that you can fund comfortably is better than stretching the budget too thin or giving nothing at all. But be aware: too low an increase can impact morale, retention and productivity, so balance the short-term cost with the long-term risk. Whatever you are doing though, communication is key. Make sure you help people understand any difficult decisions and then ensure that they are seeing consistently in how those messages reflect the decisions you make across all parts of the business, or if you need to do something that might not quite fit, explain it.

Beyond Salary: What Really Keeps People Motivated

There’s no single “correct” percentage for your salary increases. But there is a correct approach: fairness, consistency and honest communication.

Salary matters, but research is clear, it isn’t the only thing that keeps people committed or engaged. If budgets are tight, think about strengthening other areas people value:

• Development and progression
• Recognition
• Flexibility
• Trust and autonomy
• Clear communication
• Reasonable workloads

A well-explained pay decision, paired with good leadership and support, often goes further than a slightly higher increase.

How The Little HR Department Can Help

We help small businesses make confident, fair and sustainable pay decisions. We can support you with:

• Salary benchmarking
• Benefits reviews (including low/no-cost options)
• Employee engagement surveys
• Advice on structuring and communicating pay reviews

If you’d like help shaping your 2026 pay approach, or just want to talk things through, get in touch with our team at hello@thelittlehrdepartment.com