Deciding how much to increase pay is rarely straightforward. And as we head towards 2027, organisations face a familiar balancing act of affordability, market competitiveness and fairness.
Your people are feeling the impact of rising living costs, while your organisation may be managing increasing overheads, tighter budgets and pressure to remain competitive.
So, should you match inflation, follow the market or give everyone the same percentage increase?
The answer isn’t always as easy a just setting a percentage. It's about making pay decisions that are affordable, competitive, fair and sustainable for your organisation.
What are the pay predictions for 2027?
The latest figures provide some useful context:
3% – Median pay award employers expect over the next 12 months, according to CIPD's Summer 2026 Labour Market Outlook.
3.4% – Average UK salary increases budgeted for 2027, according to salary experts Willia Towers Watson's July 2026 Salary Budget Planning Report.
3.5% – Annual CPI inflation in September 2026, according to the ONS.
5% - the Bank of England’s predicted inflation rate for mid-2027.
3.9% – Increase in the National Living Wage from April 2027, taking the hourly rate for workers aged 21 and over to £13.21.
These figures are helpful starting points, but they need to be considered in context.
At the highest level the last few years have shown us that what people expect is not always what we get. It’s not that the data is bad, it is more that there is only so much that any organisation can reasonably predict within the highly changeable landscape we find ourselves in. Equally, these benchmarks must then be considered in the specific organisational and market reality for any given employer.
A 3% increase might be appropriate for one organisation, unaffordable for another and insufficient to address pay problems in a third.
Affordability: Balancing the short and long term impacts
Before deciding on pay increases, consider what your organisation can sustainably afford.
A permanent salary increase isn't just a cost for 2027. It increases your ongoing payroll commitments, including potentially pension contributions and employer National Insurance.
For example, a 3% increase on a £500,000 salary bill adds £15,000 annually, before additional employer costs.
But there's another question worth asking: What might it cost you not to increase pay?
Falling behind the market could mean losing experienced people, struggling to recruit or placing additional pressure on those who remain.
That doesn't mean stretching budgets beyond what's sustainable. It means considering both the cost of increasing pay and the potential consequences of not doing so.
Fairness: Does everyone need the same increase?
Giving everyone the same percentage increase can feel like the fairest option. It's simple, consistent and easy to explain.
But it doesn't necessarily create equitable pay.
Imagine two people doing equivalent work, one earning £30,000 and the other £35,000. A 3% increase gives them an additional £900 and £1,050 respectively, widening the existing salary gap.
There may be legitimate reasons for that difference. But what if it simply reflects different starting salaries negotiated several years again
An across-the-board increase can preserve existing inequalities rather than address them.
Before agreeing pay awards, consider whether your current salary differences are reasonable, consistent and objectively justified.
Retention: Are you paying enough to keep the people you need?
Pay isn't everything. Culture, flexibility, development opportunities and good management all influence whether people stay.
But if employees believe they're being paid unfairly, or can earn considerably more elsewhere, those other benefits may not be enough.
Consider where you might face genuine recruitment or retention difficulties, particularly in roles requiring specialist skills.
However, avoid automatically increasing salaries simply because someone threatens to leave. Without clear criteria, reactive decisions can create further inequalities. The person shouting the loudest is not necessarily the one whose pay most needs reviewing.
If you are not sure how you are stacking up against market, prior to making pay decisions is a great time to check where you stand.
The aim is to understand where pay is genuinely an issue, rather than assuming every retention problem needs a financial solution.
Making the most of your pay budget
You don't necessarily have to choose between giving everyone an increase and targeting particular employees.
Depending on your circumstances, you could consider:
General increases to recognise wider cost-of-living pressures.
Targeted market adjustments where salaries have fallen behind comparable roles.
Pay equity adjustments to address unjustified salary differences.
Salary structure reviews to address compression and progression.
One-off payments where appropriate, without increasing permanent salary commitments.
A combination may be the most effective use of a limited budget, provided decisions are based on clear, fair and consistent criteria.
Five questions before you decide
What can we sustainably afford? Have we considered the full ongoing costs?
Are our salaries competitive? Do we know how they compare with the market?
Are our pay arrangements fair? Can we explain differences between individuals and roles?
Where are our biggest risks? Are there recruitment, retention or salary compression concerns?
Can we explain our decisions? Are they evidence-based, consistent and transparent?
The bottom line
There's no magic percentage for 2027.
Matching inflation, following market averages or giving everyone the same increase might seem straightforward, but it won't necessarily deliver the best outcome for your organisation or your people.
You may not be able to pay everyone what they'd ideally like. But you should be able to explain why you pay people what you do, how you've reached your decisions and why your approach is fair.
That's a much stronger starting point than simply choosing a percentage.
If you're planning your 2027 pay review, we can help you understand market rates, review pay fairness and develop an approach that works for your organisation and your people.