Background

The Chancellor is expected to confirm in the November 2025 Budget that the National Living Wage will rise by around 4% from £12.21 to at least £12.70 per hour in April 2026. This increase will have significant consequences not only for pay but also for workplace pension contributions under the auto-enrolment regime. Auto-enrolment requires employers to enrol eligible staff into a workplace pension scheme, with employees contributing 5% of qualifying earnings and employers contributing a minimum of 3%. Eligibility is triggered when an employee is aged 22 or over, under State Pension Age, and earns more than £10,000 per year with a single employer.

Impact on Pension Contributions

The rise in the minimum wage will increase pension contributions across the workforce. For example, someone working a standard 37.5-hour week will see weekly pay rise from £457 to £476, an annual increase of £988. Employer pension contributions will also increase, rising from £761 to £792 a year. A worker starting at age 22 on the new minimum wage and remaining on inflation-adjusted rates throughout their career could retire at 68 with a pension pot worth approximately £276,500, compared with £240,100 under the current minimum wage.

Expansion of Auto-Enrolment Coverage

The increase in the National Living Wage will also bring thousands of part-time workers into scope for auto-enrolment. At present, many part-time staff earning below £10,000 annually are excluded. With the new rate, individuals working around 15 hours per week at £12.70 per hour will be close to the threshold, and modest increases in hours or overtime will push them into eligibility. This expansion will widen pension participation and ensure more workers benefit from employer contributions and government tax relief.

Implications for Employers

For employers, the increase in the National Living Wage will mean higher payroll costs and a corresponding rise in pension contributions. Payroll and compliance systems must be updated to reflect the new wage rates and to capture newly eligible employees who cross the £10,000 threshold.

Employers will need to communicate clearly with staff about changes in take-home pay, pension deductions, and the long-term benefits of participation. Compliance obligations will also increase, as failure to enrol eligible staff could expose employers to regulatory penalties.

Strategically, organisations may wish to review their pension offering, particularly where they provide contributions above the statutory minimum, to assess the financial impact of the expanded coverage.

Implications for Employees

For employees, the rise in the minimum wage represents both an immediate increase in income and a longer-term boost to retirement savings. Those already enrolled will see higher contributions from themselves and their employers, which will compound over time to deliver larger pension pots.

More importantly, thousands of part-time workers who previously earned below £10,000 annually will now become eligible for auto-enrolment. This change will give them access to employer contributions and government tax relief.

While the increase in contributions will reduce take-home pay slightly, the long-term benefits of saving through auto-enrolment are significant. Employees should be encouraged to remain in the scheme rather than opting out, as doing so would mean forfeiting employer contributions and tax relief.

If you want to read more about the national minimum wage changes expected to take place in April, our article: https://www.berrysmith.com/news/how-will-the-national-living-wage-change-in-april-2026/ explores this topic in more detail.

Please note the contents of this article do not constitute legal advice. If you require any further information or if you would like our assistance, please contact us at employment@berrysmith.com or on 02920 345 511.