For business owners, employment costs are likely to be one of the biggest concerns. With National Minimum Wage and National Living Wage increases, as well as increased Employer National Insurance contributions over the last year, decisions about pay, recruitment and retention have become far more complex than they were just a few years ago.
In our March 2026 Business Confidence Survey, based on responses from 245 UK businesses, 61.3% told us they expect rising employment costs to have a negative impact on their business. That pressure is rarely felt in isolation — it often comes alongside higher tax burdens, ongoing regulatory change and uncertainty around customer demand.
Employment costs under pressure
For many business owners, wage increases aren’t just a payroll issue. They affect pricing decisions, cashflow, investment plans and, ultimately, the longterm sustainability of the business.
Our recent survey shows that most businesses are responding cautiously. 71.8% plan to maintain their workforce rather than expand aggressively, while 12.7% anticipate reducing headcount. This reflects a desire to retain skills and stability, while avoiding commitments that could become difficult to sustain if costs continue to rise.
Why wage costs matter so much
Employment costs sit at the heart of many commercial decisions. Absorbing higher wages without adjusting other areas of the business is rarely viable over the long term, particularly where margins are already under pressure.
That is why to remain successful, businesses need to step back and look at the bigger picture — not just what they pay people, but how roles are structured, how productivity is measured and how staffing costs fit within wider financial planning.
Managing employment costs strategically
To manage rising employment costs, businesses should take a more joinedup approach and consider:
1. Improving workforce productivity
Higher productivity can offset increased employment costs.
Streamline processes to reduce duplication or wasted time
Utilise technology to automate repetitive tasks
Set clear performance targets and accountability
2. Forecasting staffing costs alongside tax and cashflow
Build employment costs into wider financial forecasts to improve visibility and decision-making.` Ensure wage increases are reflected in pricing, margins and overall commercial planning, rather than absorbed in isolation.
3. Reviewing pay structure and incentives
Align employment costs with business performance and maintain employee satisfaction without large cost increases.
Link rewards to business results or individual outcomes
Review overtime policies and reduce unnecessary overtime
Promote low cost benefits such as flexible hours and remote work
Offer flexible benefits and salary sacrifice options to allow employees to choose benefits they value most
4. Ensuring available allowances and reliefs are fully utilised
Make full use of available employment-related tax reliefs and allowances to reduce overall cost pressures.
These steps won’t remove cost pressures entirely, but they can reduce uncertainty and help you make more confident decisions.
Employment decisions are most effective when they’re considered alongside tax, cashflow and wider financial planning — not in isolation.
We can support with integrated advice across payroll, employment taxes, forecasting and financial strategy, helping you understand the true cost of staffing decisions and plan sustainably for the future.
If you would like further advice and support in this area, please get in touch on 0808 144 5575 or email help@armstrongwatson.co.uk.
