What the Spring Forecast 2026 Means for Employers and Payroll

The Spring Forecast 2026 did not introduce major new payroll taxes or employment rules. However, it still provides important signals for employers.

The forecast updates projections for economic growth, inflation, wages and employment. These factors influence staff pay, hiring decisions and overall payroll costs.

For many businesses, payroll is one of the largest ongoing expenses. Changes in wages, tax thresholds and economic conditions can all affect how much employers pay staff and how much employees take home.

While there are no headline payroll announcements, several trends highlighted in the forecast will affect employers over the next few years.

Below are the key points employers and payroll teams should understand.

Frozen tax thresholds mean higher tax for many employees

Income tax thresholds remain frozen until 2030/31.

This means the points where employees start paying higher tax rates will not increase with inflation or wage growth.

As wages rise over time, more employees move into higher tax bands. The result is that employees pay more tax even though the tax rates themselves have not changed.

This effect is often called fiscal drag. In simple terms, rising wages push more income into higher tax brackets.

For employers and payroll teams, this means more employees will move into higher rate tax bands in the coming years. PAYE deductions may increase even when salary increases appear modest.

This can sometimes lead to questions from employees about why their take home pay has not increased as much as expected after a pay rise.

Clear communication around payslips and deductions becomes increasingly important. Employees may benefit from understanding how frozen thresholds affect their pay.

Employees who are approaching higher rate tax bands may also wish to review pension contributions, as these can help reduce taxable income.

Wage growth is expected to slow

The forecast suggests that wage growth will continue but at a slower pace.

Average wage growth is expected to be around 3.5 percent in 2026. In later years, it is expected to settle between 2 percent and 3 percent.

This means real wage growth may remain relatively modest once inflation is taken into account.

For employers, this may lead to more controlled pay increases compared with the rapid wage growth seen in recent years.

Salary reviews will remain an important part of workforce planning. Employers should continue to factor pay increases into annual budgets and payroll forecasts.

Payroll systems will also need to manage regular pay adjustments as businesses continue to review salaries in response to market conditions and employee expectations.

Labour market conditions may soften slightly

The labour market remains relatively strong, but the forecast suggests some softening in the coming years.

Unemployment is expected to rise to around 5.3 percent in 2026 before falling again to around 4.1 percent by 2030.

For some employers, this may lead to slightly easier recruitment conditions and a larger pool of candidates for certain roles.

In some sectors, this could reduce pressure on wages that has been driven by labour shortages.

However, many industries are still expected to experience skills shortages, particularly in specialist or technical roles.

Employers may benefit from focusing on staff retention, training and workforce planning rather than relying purely on recruitment to meet future needs.

Employer payroll costs remain a key business expense

Employer National Insurance continues to be a major cost for businesses that employ staff.

Payroll taxes form a significant part of the total cost of employing someone, alongside salary, pension contributions and other benefits.

Previous changes to employer National Insurance continue to affect staffing costs, particularly for businesses with larger teams.

When employers consider hiring new staff or expanding their workforce, payroll taxes remain an important factor in the overall cost of employment.

Accurate payroll reporting and compliance are therefore essential. Employers need reliable payroll processes to make sure tax deductions, National Insurance and pension contributions are calculated correctly.

The overall tax burden is rising

The forecast projects that the UK tax burden will reach around 38.5 percent of GDP by 2030. This would be the highest level in decades.

Much of this revenue comes from employment taxes.

Income tax and National Insurance remain two of the largest sources of government revenue. As a result, payroll reporting and PAYE deductions remain closely monitored.

For businesses, this means payroll compliance will continue to receive significant attention from HMRC.

Employers should make sure their payroll records, RTI submissions and employee data are accurate and submitted on time.

Strong payroll processes help reduce the risk of errors, penalties or compliance issues.

Interest rates and economic conditions still affect payroll planning

Interest rates are expected to ease slightly in the coming years, but they are still likely to remain higher than the levels seen in the 2010s.

Higher borrowing costs can affect business cash flow and investment decisions.

For some employers, this may lead to more cautious hiring plans or slower workforce expansion.

Payroll planning therefore remains closely linked to wider financial planning. Businesses often need to balance staffing costs with other financial commitments such as borrowing, investment and operating expenses.

Careful workforce planning can help employers manage these pressures while maintaining a stable and productive team.

What employers should focus on

Employers can take several practical steps to manage payroll costs and plan ahead.

Review payroll costs regularly so you understand how staffing expenses are changing over time.

Plan for gradual increases in employee tax as frozen thresholds push more income into higher tax bands.

Communicate clearly with staff about pay rises, deductions and how tax thresholds affect take home pay.

Make sure payroll systems and reporting processes remain accurate and compliant with HMRC requirements.

A proactive approach to payroll planning can help businesses manage costs while supporting employees through changing economic conditions.

Need support with payroll?

Managing payroll alongside changing tax rules and economic conditions can take time and attention.

Speak to our payroll team if you would like support managing payroll costs, reporting and compliance.