Budget 2026: 3.9% Minimum Wage Rise Lands as Entry-Level Jobs Shrink

Government support for small businesses is falling short of their needs, regardless of policies announced in the Autumn Budget, business insiders suggest.

After years of struggling to adjust to major policy changes, from the rise in employer National Insurance contributions, to successive minimum wage increases and a jobs market in which entry-level vacancies continue to fall, Chancellor John Healey’s first Budget under Prime Minister Andy Burnham has arrived amid widespread concern across the small business community.

One of the most pressing worries has been the cost of bringing on new staff in a hiring market where job vacancies have dropped to a five-year low and youth unemployment hit an 11-year high earlier this year.

The Chancellor confirmed a minimum wage rise in his Budget speech, saying that “for 2.3 million of our lowest paid workers” he would increase “both the national minimum wage and the national living wage by 3.9%”.

That means the National Living Wage, which covers workers aged 21 and over, will rise from £12.71 to £13.21 an hour from next April, with the rate for 18 to 20-year-olds rising to about £11.27, adding to the unease employers are feeling. It also puts the youth rate in line with the adult rate, rather than outpacing it as it has for the past three years, slowing Labour’s plan to pay younger workers the same as those aged 21 and over.

The biggest of those pressures predates this Budget. Alan Milburn’s interim review into the number of young people not in education, employment or training (NEETs) estimated that last year’s employer National Insurance rise alone added around £4,000 to the annual cost of hiring a young person. Meanwhile, the number of NEETs aged 16-24 passed one million earlier this year for the first time since 2013. The Chancellor confirmed that Alan Milburn and the Timms panel will publish their final reports next month, with a white paper and legislation to follow.

Natalie Lewis, founder of HR consultancy Dynamic HR Services, sees those pressures across the business-to-business, tech and accountancy businesses she advises. 

“Before two years ago, every single one of my clients had really strong growth plans”, she told Employment Hero, adding that now, “all growth plans have been shelved. Most of my clients are in contraction.”

How the Minimum Wage Rise Affects Small Business Hiring

Holding back pay rises for 18 to 20-year-olds does nothing about National Insurance, sick pay or the other costs of employing them, which is why Natalie doubts it will change her clients’ decisions. 

“Whilst it sounds as though the Government may limit minimum wage increases for younger workers, I don’t believe that will make a meaningful difference to recruitment decisions. Employers already benefit from National Insurance relief for under 21s, but they’re still facing rising wage bills, increased employment costs and additional legislative obligations. A marginal saving on wages isn’t going to persuade a business to recruit when the overall cost of employing people continues to rise.”

The TUC also questions how much the youth rate shapes hiring decisions, though it reaches the opposite conclusion and wants the rate scrapped altogether. Its analysis of Low Pay Commission data, published in March, found that 85% of 18 to 20-year-old employees were already paid above their age group’s minimum rate, and 63% at the adult rate or higher. 

For employers, the 3.9% rise in the adult rate matters more than the youth rate, because it lifts the floor for every low-paid role, not just those filled by younger workers.

In Employment Hero’s YouGov survey of more than 1,000 UK businesses, carried out this spring, 71% of businesses named higher salaries as the main driver of rising employment costs. That pressure has knock-on effects for the least experienced candidates, including apprentices, at a time when 73% of SME leaders told Employment Hero earlier this year that they intended to use new Government apprenticeship schemes. Kevin Fitzgerald, UK Managing Director at Employment Hero, said:

“Apprenticeships are a great way for young people to get their first foothold in work, so I’m hoping to see more support here following Milburn’s report. We must remember that for a small business, training an apprentice takes time and money before the investment pays off, which is why many are looking for candidates with previous experience. Support that helps SMEs sustain the investment long term can turn an entry-level opportunity into a lasting career.”

The Wider Costs Weighing on Small Business Hiring

For Natalie’s clients, the youth rate is one cost among many. 

“If you stack up the higher wages then higher tax, increased red tape and all this new legislation that’s coming in, the majority of small businesses are in survival mode,” she says.

On red tape, the Chancellor promised to remove “regulation and tariffs worth £800 million to business” and said he was “re-establishing the Better Regulation Executive to cut outdated regulations and admin burdens on business”.

Many of the extra costs businesses are facing date back to the October 2024 Budget. A year on, Employment Hero’s data showed small business employment growth still well below pre-rise levels. This April added the £12.71 National Living Wage, day-one statutory sick pay under the Employment Rights Act and, for many, higher bills after the April 2026 business rates revaluation. Employment Hero’s YouGov survey also found the cost of employing someone full-time had risen 9.6% in a year, with some 65% of businesses saying new employment law had added to their costs, and 39% cutting back on full-time recruitment. 

The Chancellor offered relief on that front for some, raising the threshold for small business rate relief “for retail hospitality and leisure businesses from £12,000 to £18,000”, which he said “means half of our shops, restaurants and gyms pay no business rates at all”. Kevin, who highlights Employment Hero’s survey of businesses in Leeds and Manchester earlier this month, said the relief covers only part of what they asked for:

“There were some welcome measures for small businesses in today’s Budget, but there is much more to do. Business rates relief for many more of Britain’s SME is welcome news, especially for businesses in the North we spoke to earlier this month. Alongside those who called for business rates relief, nearly half also asked for support with hiring and training new staff and apprentices.”

Geopolitical challenges have also pushed up energy costs, leaving businesses facing bill rises of up to 80%, with rising inflation also a concern. And while the OBR has upgraded its growth forecast to 1.2% this year, it expects growth to slow to 1% in 2027. Pointing to past rises in dividend tax as well, Natalie says the balance between risk and reward has shifted for owners: “There’s no reward anymore. It’s just all risk from a business owner’s point of view.”

What Employment Hero Data Shows About Hiring After Each Budget

Employment Hero’s payroll data shows small businesses have kept hiring through each of those shocks, but on different terms. Employment growth dipped after the October 2024 Budget, the April 2025 National Insurance rise and the November 2025 Budget, and recovered within months each time.

What has changed is the shape of that hiring. In March, full-time employment at small businesses was up 14.6% year on year, while the part-time and casual roles young people have long relied on continued to contract. Median wage growth peaked at 6.4% in April 2026, when the current minimum wage rates came in, before easing to 5.1% by September. That suggests businesses absorbed the new rates and then held back on pay rather than cutting jobs.

What Small Businesses Need From the Budget

Before the Budget, UKHospitality, whose sector provides a third of first jobs for under-25s, joined the British Retail Consortium in pressing for lower employer contributions, a call the Budget didn’t meet. Earlier this month, the Government also rejected MPs’ recommendation to extend employer National Insurance relief to all under-25s.

For Natalie, a cut to employer National Insurance is the change she says her clients most need.

“What I would be looking for would be a meaningful reduction of cost in employing people. So, reducing employers’ national insurance. Alongside that, I think we need a more predictable environment for planning and investing.” Any support, she adds, “needs to make the ongoing sums work.”

The Chancellor’s speech focused on investment rather than employment costs: “The biggest barrier to fast growth firms here in Britain is investment here in Britain,” he told the House of Commons, announcing “a further £20.4 billion for the National Wealth Fund and the British Business Bank over the coming years, supporting 140,000 jobs”.

The Chancellor also confirmed that “from next year, 20% of business rates revenues will go to mayors, and from 2028, a share of income tax receipts will go to mayors as well”, backed by “a further £1.5 billion of devolved loans for mayoral authorities”. Kevin says that support has to reach the smallest employers: “Micro-businesses with fewer than 10 employees make up 95% of UK businesses, yet our research of businesses in the North found that only 55% are confident that devolution will deliver practical support. The focus on moving money and powers out of Westminster will prove futile if local businesses can’t use them to hire and grow.”

What the Employment Rights Act Means for Small Business Hiring in 2027

Whatever relief the Budget offers, it arrives ahead of the next wave of employment law. From 30 October, employers face a stronger duty to prevent sexual harassment. From 1 January 2027, unfair dismissal protection will apply after six months’ service rather than two years, compensation caps will be removed and fire-and-rehire banned, with guaranteed hours for zero-hours workers due later that year. 

For employers already favouring experienced, full-time staff, that shortens the window to judge whether a new hire is working out. And because time already worked counts towards the six months, anyone employed on or before 1 July 2026 will be able to bring an unfair dismissal claim from the day the rules change.