Adapting to the Real Living Wage: What SMEs Need to Know

The Real Living Wage is climbing again, challenging SMEs to balance staff support with financial resilience.

The Living Wage Foundation announced an increase to its voluntary Real Living Wage rates on Wednesday, with the recommended minimum pay rising from £12 an hour to £13.45 across the UK, and from £13.15 to £14.80 in London.

Although the pay benchmark is voluntary, it remains an important reference point for employers reviewing pay and workforce plans. Arriving just weeks before the next Budget and at a moment when cost pressures continue to build for small businesses, the update offers a timely indicator of where wage expectations are heading and what employers may need to factor into their planning.

What it Means for Small Businesses

The latest Real Living Wage increase has arrived at a difficult period when businesses are straddling higher labour, energy and supply costs while planning for an uncertain year ahead. While the new rates are likely to encourage employers to think about how they can support staff, they also underline the limits of what smaller firms can afford.

This year’s six to seven per cent Real Living Wage rise, based on the cost of essentials such as rent and food, widens the gap between the statutory minimum and what employees now see as a fair wage. Some SMEs will be able to adjust pay through careful budgeting or gradual increases. Others, particularly in sectors with tight margins such as retail, hospitality and care, may find it harder to keep pace.

Pay Growth Among SMEs

Employment Hero data for September found that average wages grew by 3.0% in September and were up 2.2% year on year. While pay is rising, most small businesses are approaching with caution, and at a slower rate than the new Real Living Wage. The gap highlights a growing tension between what employees need and what employers can sustain.

When increasing wages is not possible, SMEs may look for other ways to retain and support staff. Flexible working arrangements, predictable scheduling and transparent communication about business challenges can help maintain trust and morale. For many small employers, being open about financial realities while showing commitment to fairness can make a measurable difference to retention and engagement.

A Challenging Backdrop for Hiring and Pay

The rise in the Real Living Wage comes at a time when many small businesses are facing tight margins and difficult choices about pay. Labour shortages continue in sectors such as hospitality, care and construction, keeping competition for staff high. At the same time, employers are looking ahead to the Autumn Budget for clarity on issues such as business rates, employer contributions and potential tax relief that could influence how much room they have to raise wages in the year ahead.

The uncertainty around economic policy adds another layer of complexity to workforce planning. Higher borrowing costs, inflation and cautious consumer spending are still shaping business confidence, leaving many SMEs unsure how far to stretch pay budgets. For some, the Real Living Wage increase will reinforce existing plans to lift pay gradually. For others, it will highlight the growing gap between what employees expect and what small businesses can realistically sustain.

Improving the Employee Experience

Although SME wages have increased, they remain below the latest Real Living Wage rates. The data indicates that small employers are easing pay upwards in careful, incremental steps as they manage ongoing cost pressures. 

For businesses unable to raise wages further, other aspects of the employment experience become more important. Predictable scheduling, opportunities for development and open conversations about the business’s financial position can help maintain trust and engagement. As the Budget approaches, SMEs will be watching closely for measures that could ease cost pressures and create more scope to invest in their people.

What SMEs Can Do Next

The Real Living Wage increase may not see employers make any drastic changes any time soon, but it does highlight the need for more support for small businesses. 

Kevin Fitzgerald, Managing Director at Employment Hero, said: 

“Living costs are still climbing, and many workers are feeling the pressure – our recent report found that one in five Brits now have to work more than one job just to earn enough to get by. But we can’t ignore that most employers, especially SMEs, are also being squeezed. They don’t have endless cash to keep up with rising costs, and that puts hiring and job security at risk.

“SMEs employ the majority of the workforce, and our data shows they’re more vulnerable to policy changes and price shocks. So while the Living Wage is a force for good, the government needs to find the right balance – ensuring fair pay for workers while supporting small businesses to stay afloat.”

The latest Real Living Wage increase highlights a shifting definition of fair pay in the UK. For SMEs, it serves less as a rule to follow and more as a measure of where worker expectations are heading. Understanding that change will be key to staying connected with employees and competitive in a changing labour market.