After several years of relatively high inflation and larger pay increases, the evidence currently suggests that pay awards are beginning to settle back towards more familiar levels.
So, what should employers be thinking about when setting their 2027 pay budgets?
The emerging picture is around 3%
Current evidence suggests that 3% is becoming the central figure for 2027 pay planning.
Personnel Today, reporting on Brightmine’s pay forecast, suggests a median pay award of around 3% over the next 12 months. Around 71% of predicted settlements are expected to fall between 3% and 4%.
Recent settlement data supports that general picture. The median basic pay award in the three months to September 2026 was 3.1%, with almost 62% of settlements falling between 3% and 3.99%.
For employers starting their planning, therefore, 3% to 4% looks like a reasonable range to consider.
That does not, however, mean that every employee should automatically receive the same percentage increase.
Inflation hasn’t gone away
Inflation remains part of the picture.
CPI inflation reached 3.5% in September 2026, meaning that a 3% pay increase would currently sit slightly below inflation.
Forecasts suggest inflation should ease over time, although there remains uncertainty around how quickly this will happen. Earlier OECD forecasts reported by Personnel Today put UK inflation at around 2.6% for 2027.
For employees, however, expectations are not driven solely by forecasts. They are also influenced by what has happened to household costs over the previous year.
A 3% increase may therefore be broadly consistent with the pay market without necessarily feeling particularly generous to employees.
Different sectors will face different pressures
National averages only tell us so much.
In professional and business services, many organisations are likely to be considering increases somewhere around the general 3% to 4% market range, subject to affordability, recruitment pressures and their existing market position.
In manufacturing, engineering and logistics, the overall figure may be similar, but skills shortages can create pressure around particular technical, operational and supervisory roles. Employers may need to make targeted adjustments where specific salaries have fallen behind the external market.
For retail, hospitality, care and other sectors employing significant numbers of lower-paid workers, the position is different again.
The National Living Wage is due to increase to £13.21 per hour from April 2027, compared with £12.71, an increase of around 3.9%.
For employers with significant numbers of employees at or close to the statutory minimum, the actual increase in the wage bill could therefore be greater than a headline 3% pay budget might suggest.
Watch out for pay compression
This is an issue employers should pay particular attention to in 2027.
Where salaries at the lower end of a pay structure rise more quickly than salaries further up, the difference between roles can gradually become smaller.
For example, if the pay of production or operational employees increases because of changes to the National Living Wage, but their supervisor receives only the standard company pay award, the gap between the two roles narrows.
Repeat this over several years and the additional financial reward for accepting supervisory or management responsibility can become surprisingly small.
That can create problems with recruitment, retention and progression, particularly if employees begin to question whether the additional responsibility associated with promotion is worthwhile.
Employers should therefore look at their whole pay structure, rather than simply deciding upon a percentage increase and applying it across the board.
A 3% pay budget doesn’t have to mean 3% for everyone
There is a useful distinction between agreeing an overall pay budget and deciding how that budget should be distributed.
An employer working with an overall budget of around 3%, for example, might use it to fund:
a general increase for most employees;
larger adjustments for roles that have fallen below the external market;
specific increases to maintain supervisory or management differentials;
progression within established salary ranges; or
different treatment for employees already positioned towards the top of their market range.
This can be more effective than automatically giving everybody an identical percentage increase irrespective of their role, salary or current market position.
Affordability will remain important
Employers are understandably cautious.
Brightmine’s research found that 66% of organisations identified affordability as a downward pressure on their next pay award, while 64% identified inflation and the cost of living as an upward pressure.
That balancing act is likely to be familiar to many employers.
Employees understandably want their earnings to keep pace with their costs. Businesses, meanwhile, have to consider wage increases alongside National Insurance, pensions, energy, materials, borrowing and other operating costs.
The eventual pay decision therefore needs to be sustainable, rather than simply responding to a single economic indicator.
Look beyond basic salary
Where there is limited scope for increasing basic salaries, it is also worth looking at the wider employment package.
Pensions, holidays, flexible working, bonus arrangements, healthcare, salary sacrifice benefits and development opportunities can all contribute to the overall value of employment.
These are not substitutes for competitive basic pay, but employees increasingly look at the whole package when deciding whether to remain with an employer or move elsewhere.
So, what should employers budget for in 2027?
At this stage, around 3% appears to be a sensible starting point for pay planning, with 3% to 4% likely to capture a significant proportion of private-sector settlements.
