What is annual pay review and how does it work in the UK?

From 1 April 2026, the National Living Wage increased to £12.71 per hour, requiring many businesses to reassess salary structures and payroll budgets. At the same time, government evidence submitted to the 2026/27 Pay Review Bodies highlights ongoing labour market pressures, recruitment challenges and sustained earnings growth across several sectors.

In 2026, an annual pay review is no longer simply a compensation exercise. Rising employment costs, continued wage growth and higher statutory pay rates mean employers face increasing pressure to balance compliance, affordability and employee expectations.

An effective annual pay review helps employers ensure salaries remain legally compliant, competitive and aligned with business performance. Whether reviewing pay for a small team or an entire workforce, a structured approach can reduce retention risks, improve transparency and support long-term workforce planning.

What is an annual pay review?

An annual pay review is the process of reviewing employee salaries to decide whether a pay rise is appropriate.

Employers may consider factors such as business performance, affordability, labour market conditions and employee retention when making pay decisions.

What does the annual salary review mean?

The term annual salary review refers to the process of evaluating an employee's current salary and deciding whether adjustments are appropriate. A review does not automatically guarantee a pay increase. Instead, it provides an opportunity to assess pay against internal and external benchmarks.

Annual pay review vs annual review pay increase

An annual pay review and an annual review pay increase are not the same thing. The review is the assessment process, while a pay increase is the potential outcome. Employers may decide to maintain existing salaries if business performance, budget constraints or market conditions do not support increases.

Why are annual pay reviews important in 2026?

Annual pay reviews are particularly important in 2026 because employers face rising wage costs, labour market competition and updated minimum wage requirements.

National minimum wage compliance

From 1 April 2026, employers must ensure employee pay continues to meet applicable minimum wage rates. Failure to comply can result in HMRC enforcement action, repayment of arrears and financial penalties of up to 200% of wage underpayments, capped at £20,000 per worker.

Recruitment and retention pressures

Competitive salaries remain a significant factor in attracting and retaining employees. Pay reviews help employers benchmark remuneration against labour market conditions and address potential retention risks.

What factors influence an annual pay review?

An effective annual pay review process should balance affordability, compliance and workforce expectations.

Market salary benchmarking

Comparing salaries against industry averages helps ensure remuneration remains competitive. ONS earnings datasets can provide useful benchmarking information across sectors and occupations.

Business performance and affordability

According to ACAS guidance on pay rises, employers should consider affordability, business circumstances, employee performance and recruitment or retention needs before making pay decisions. 

How does the annual pay review process work?

The annual salary review process generally follows a structured sequence designed to ensure consistency and fairness.

Review employee and business data

Government evidence on pay and labour market trends highlights how wage growth, inflation and changing labour market conditions continue to influence employer pay decisions across the UK. These economic conditions may influence how businesses approach annual pay reviews and salary increase decisions.

Making and communicating decisions

Once salary benchmarking and business data have been reviewed, employers typically decide on a percentage increase, a flat-rate rise, or no change, depending on affordability and performance. Businesses that want to streamline this process may benefit from understanding how to pay employees and manage payroll updates efficiently.

What is an annual pay review policy?

An annual pay review policy establishes how salary reviews are conducted across the organisation.

What should an annual pay review policy include?

An annual pay review policy should explain how pay review decisions are made and applied across the organisation. Under ACAS guidance on pay rises, employers should take a consistent approach when making pay decisions and consider factors such as affordability, business circumstances, employee performance, and recruitment or retention needs.

Why is a clear annual pay review process important?

A clear annual pay review process helps employers apply consistent criteria across the workforce, reducing the risk of perceived unfairness or employee relations disputes. It also gives managers a defensible, documented rationale if a pay decision is ever challenged.

How should employers communicate and implement annual pay decisions?

Employers should confirm pay decisions in writing, set a clear effective date, and update payroll records before the next pay run. This protects both the business and the employee if the decision is ever queried, and it keeps the change compliant with employment law.

What should a pay review letter include?

A pay review letter should set out the new salary or hourly rate, the effective date of the change, and, where relevant, a short explanation of how the decision was reached (for example, performance, market benchmarking, or a statutory minimum wage uplift). Where no increase is awarded, employers should still confirm this in writing and, where appropriate, explain the reasoning, particularly if performance or affordability was the deciding factor.

⚠️ Watch out: Under section 4 of the Employment Rights Act 1996, employers must give employees a written statement of any change to their pay within one month of the change taking effect. This applies whether the change forms part of a formal annual review or a one-off adjustment.

When should a pay increase take effect?

Most employers apply pay increases from the start of the next full pay period following the decision, which keeps payroll calculations straightforward and avoids mid-period adjustments. Some employers choose to backdate a rise, for example, to the start of the financial year or the employee's review anniversary. Where this happens, the backdated amount must be calculated and paid accurately, and reflected correctly on the employee's next payslip.

How does this affect payroll accuracy?

Once a pay decision is confirmed, the new rate must be applied correctly and on time in the payroll system, including:

• any backdated arrears

• updated pension contributions

• and revised tax calculations where the change moves an employee into a different tax bracket.

Getting this step wrong is one of the most common causes of payroll errors following a pay review, so it is worth building a final payroll check into the process before the next pay run is submitted.

How do annual pay reviews relate to gross annual pay?

Annual pay reviews directly affect an employee's gross annual pay, which represents total earnings before deductions such as Income Tax and National Insurance contributions.

What is gross annual pay?

Gross annual pay refers to an employee's total earnings before deductions such as Income Tax and National Insurance contributions are applied. It is necessary to understand your pay in order to clearly justify any raise in it.

What is an annual salary?

Some employers pay workers an annual salary, meaning they receive a fixed amount over the course of a year rather than being paid solely based on hours worked. Annual salary arrangements must still comply with National Minimum Wage requirements.

An effective annual pay review is no longer simply a reward for workers. In 2026, it has become a strategic process that helps employers maintain compliance, manage payroll costs, and remain competitive in the labour market. 

By combining a clear annual pay review policy, objective salary benchmarking, minimum wage compliance checks and transparent communication, businesses can create a fair and sustainable approach to compensation. Whether a single employee's salary is reviewed or a company-wide reward strategy gets implemented, a structured annual review process can help ensure pay decisions support both business objectives and workforce expectations.

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