Using our heads to solve your Reward challenges.
Following our article looking back at the key Reward moments of 2025, now let's look forward into 2026. The reward landscape is evolving faster than ever. At Reward Heads, we've been asking: what trends will shape the year ahead? What are we seeing in the market and what challenges are our clients asking for us to solve?
Here are the key themes we believe every HR and reward professional should have on their radar.
1. National Living Wage and Pay Compression
From April 2026, the new National Living Wage (NLW) rises to £12.71, a 4.1% increase, with even higher rises for those aged under 21. Whilst these numbers were not a surprise, NLW has gone up above inflation for many years now and is leading to some really tough questions and decisions.
While the increases are positive for younger and low-paid workers on the surface, it raises critical questions around talent investment. There is a risk around costs and sustainability; employers may opt to cut hours or reduce headcounts following the increase due to budgetary constraints. Also, employers may hesitate to hire first-time workers who need more training but cost the same as more experienced workers.
Related to the NLW increase, one issue we consistently hear organisations worrying about is pay compression. Organisations have limited pay budgets, and higher increases for those on the lowest pay, especially if organisations have large populations paid at or near the NLW, means there is much less of the budget left for pay rises in the rest of the organisation. As such, we see consistent and increasing pay compression as the pay floor rises while there's little room for everyone else to move. Organisations must find a way to tackle compression while maintaining sustainable pay practices that attract and retain key talent, and may need to explore creative options.
Organisations should expect continued pay compression across the market - a challenge with, unfortunately, no easy fix - and begin to examine how they can mitigate its effects in future, if they have not already done so. We have been talking to a number of clients about how to manage Total Reward and ensuring new Org Design lines up with reward.
2. Salary Growth vs Inflation
From both speaking to our various forum groups and examining market data, it appears pay awards are levelling out at around 3%, despite inflation still being above that, meaning there's a significant chance of employees taking a real-terms pay cut. As such, some employees will feel the pinch, and employers will need to explore how they can support their teams in other ways and emphasise the value of the wider Reward package beyond base pay.
Alos, employees will need to be mindful of the impacts on wellbeing and motivation. Employees who see those in lower levels receiving higher pay rises to maintain regulatory compliance may feel dispirited or lose motivation due to feeling the value of their work isn't truly recognised, especially if your organisation has offered graduated increases more than once recently. Therefore, employers need to examine how they can maintain sustainable and legally compliant pay that feels fair to those at all levels in their organisation.
A key trend we have seen this year that we expect to increase in 2026 is being asked to help write pay principles and a pay policy that is right for each organisation, their sector, their lifestage and their economic conditions.
3. Salary Sacrifice and Pensions
The 2025 Budget contained the announcement that, from 2029, employees will only receive National Insurance relief on salary sacrifice pension contributions up to an annual £2000 cap. Many organisations are considering are accelerating pension salary sacrifice schemes to maximise savings before the change.
Employers should consider how and if they want to offer salary sacrifice benefits going forward, whether they have the resource and systems to administer any changes that are introduced, and how they will communicate the change to their employees to ensure it's understood and that employees can make the best financial decisions for them.
We expect to hear more about the changes to salary sacrifice and how these will work in practice in 2026 and beyond. For now we are supporting clients in both implementing salary sacrifice and in explaining it.
4. Recognition as a Retention Lever
2025 has shown us that recognition is not just a “nice to have”; it is a strategic necessity and can be a key retention driver.
Gallup's 2025 State of the Workplace report found that only 1 in 5 employees feel engaged, while a 2025 survey by Perkbox found that over half of UK employees who feel undervalued plan to leave their roles if things don't change. The Perkbox survey also found that large organisations (those with 1000 or more employees) scored lowest on employees feeling valued.
Organisations should assess how they give recognition, how often, and whether it is currently helping employees feel valued, and thus more likely to remain with the organisation. Recognition that is personal and frequent will be key to retention, inclusion, and productivity; the Perkbox survey found that for 53% of respondents, recognition is the main driver of feeling valued, while 79% said personalised benefits would help them feel more valued.
We do a lot of work on benefits ensuring that they meet the needs of the diverse employees of our client organisations - more about personalisation later. We have delivered recognition toolkits in many forms - it does not need to be a large IT investment.
5. Pay Transparency
7th June 2026 is the deadline for all EU member states to fully transpose the EU Pay Transparency Directive into law. The Directive, along with pay transparency regulations in some US states, has generated significant interest in pay transparency as organisations work to comply with the new requirements. While the EUPTD won't apply to the United Kingdom post-Brexit, UK-based organisations that also operate in the EU will need to comply, potentially with differing legislation across multiple countries. These organisations will need to grapple with the approach they wish to take; will they implement pay transparency in the UK even though they're not required to, or will they only do so in the EU?
These conversations don't happen in a bubble. UK employees want to know what they're receiving, why, and how they can increase their reward package. “Fair pay” long ago moved beyond meaning only equal pay; employees are consistently demanding clarity and consistently followed processes.
Employers should expect to hear more news about the various transposition efforts of each EU member state as the deadline approaches.
We are already being asked for lots of support for organisations operating only in the UK who are seeking to deliver more transparency - robust levelling frameworks, all roles with clear pay ranges, pay polices explaining how a pay range is created and how an individual is located within that, in particular.
6. Wellbeing and Personalisation
Two long-running reward trends, and ones that we expect to see continue, are wellbeing and personalisation. Employees increasingly expect employers to provide benefits that meet a range of wellbeing needs, with some recent trends being menopause and reproductive health, mental health support, financial wellbeing and education, and neurodiversity support. Also, employees increasingly expect and desire personalised benefits, rather than a “one size fits all” approach that may or may not offer them benefits they value. Also, soon we will have five-generation workplaces for the first time, and every generation values different kinds of benefits to suit their current life-stage. As such, employers will need to account for these wide-ranging needs while offering a sustainable benefits package, which personalisation offers a route towards.
Furthermore, organisations are increasingly demanding solid business-case justifications and proof of return on investment when allocating budgets for benefits spend. As such, organisations need to ensure efficient spend on benefits that delivers this ROI, while being able to concretely demonstrate it (a notoriously frustrating concern for those in the benefits space). Organisations could consider personalisation as a way to drive efficiency in benefits spend while considering how they can use data from their providers and platforms to demonstrate ROI.
These are key themes in benefits projects that we are carrying out for clients - from understanding what is wanted and what is used, to what is available in the market, to how to communicate this.
Looking Ahead
2026 will demand adaptability. Organisations must recognise the human side of reward, while staying compliant and cost-conscious.
If these themes resonate and you’d like support shaping your reward strategy, please get in touch as we would love to help: rewardsolutions@rewardheads.co.uk.