How Much Should Salaries Increase Each Year In the UK?

If you’re running a small business or startup, deciding pay rises can feel like walking a tightrope. You want to keep great people, stay competitive, and reward performance - but you also need to protect cash flow and avoid setting expectations you can’t sustain.

It’s also no surprise that founders end up Googling the same question employees ask: how much should your salary increase per year in the UK?

The tricky part is that there isn’t one “correct” number. What’s appropriate depends on inflation, market rates, role scarcity, performance, your business stage, and (crucially) what your contracts and processes allow you to do.

Below, we’ll walk through a practical framework you can use to set annual pay rises confidently - and the key legal points to keep in mind when reviewing and changing salaries in the UK.

Why Annual Pay Rises Matter (Even If You’re Cash-Conscious)

In early-stage businesses, payroll is often the biggest ongoing cost. So it’s tempting to avoid salary increases entirely, or to handle them ad hoc when someone threatens to leave.

But consistent pay review practices can actually reduce risk and cost over time, because they help you:

• Retain talent (replacing employees is expensive and time-consuming)
• Stay competitive against market rates (especially in fast-moving roles like sales, engineering, product, and operations)
• Reward performance fairly (reducing resentment and disengagement)
• Plan cash flow by forecasting payroll changes annually rather than absorbing surprise increases
• Reduce disputes by setting clear expectations about how and when pay is reviewed

Just as importantly, pay decisions can become a legal issue if employees believe raises (or lack of raises) are discriminatory or inconsistent. A structured process won’t eliminate every risk, but it helps you show decisions were made fairly and based on legitimate business factors.

Is There A “Standard” Salary Increase Each Year In The UK?

Most business owners asking how much a salary should increase per year in the UK are really looking for a rule of thumb.

In practice, UK employers tend to think about annual salary increases in a few broad buckets:

1) Cost-Of-Living / Inflation-Linked Increases

A cost-of-living increase aims to stop pay from going backwards in real terms.

Some businesses set a baseline annual uplift (for example, a modest percentage across most roles), then add performance-based increases on top. Others only give inflation-linked increases in years where inflation is unusually high or where retention risk is high.

Practical tip: If you can’t match inflation, consider alternatives that still support retention - e.g. one-off bonuses, additional leave, clearer promotion timelines, or enhanced flexibility (where workable).

2) Market Adjustments

Sometimes the question isn’t “what’s a fair annual increase?” but “are we paying enough to keep this person?”

Market adjustments are common when:

• you hired quickly and underpaid compared to market
• the role has changed significantly over the year
• the market has moved (for example, skills shortages)

These can be larger than standard annual increases - and that’s fine - as long as you’re consistent, can justify the rationale, and manage internal pay fairness.

3) Performance And Promotion Increases

Performance increases should link to measurable outcomes. Promotion increases should reflect that the employee is taking on a new level of responsibility, not just doing more work.

Where startups go wrong is treating promotions informally (“you’re basically a manager now”) without updating title, responsibilities, and pay in a clear, documented way.

So What Percentage Should You Use?

There isn’t a legal requirement to increase salaries every year (more on that below), and the “right” number varies. But from a small business perspective, what matters most is that you choose an approach that is:

• commercially sustainable (you can afford it this year and you can afford the precedent it sets)
• internally consistent (people doing similar work on similar performance shouldn’t be treated wildly differently without good reason)
• externally defensible (if challenged, you can explain the factors you considered)

If you want a simple starting point, many employers use:

• a baseline annual review uplift (to reflect cost of living and retention), and
• additional increases for high performance, skill scarcity, or promotions.

What you should avoid is randomly picking a number without being clear whether it’s meant to cover inflation, performance, market movement, or all three.

The Legal Basics You Need To Get Right Before Changing Pay

Before you decide how much to increase salaries, it’s worth checking the legal “guardrails” around pay. Most pay rise problems aren’t about the amount - they’re about the process and documentation.

1) There’s No General Legal Duty To Give A Pay Rise Each Year

In the UK, employers generally do not have to increase pay annually unless:

• the employment contract says pay increases happen (or sets a pay review mechanism)
• a collective agreement applies (more common in unionised settings)
• there’s an established custom and practice of annual pay rises that has become an implied term (this is fact-specific)

That said, you do have to keep pay compliant with minimum legal standards as they change.

2) You Must Meet National Minimum Wage / National Living Wage

If salary thresholds increase (or an employee’s age bracket changes), you need to ensure pay remains above the relevant minimum rate.

This is especially important for:

• hourly-paid staff
• apprentices
• staff on salaries that are close to minimum wage once you break it down by hours worked

3) Equal Pay And Discrimination Risks

Pay decisions can create risk under the Equality Act 2010 if employees believe pay rises are influenced by protected characteristics (such as sex, race, disability, age, pregnancy/maternity, religion/belief, sexual orientation, etc.).

Even if that’s not your intention, inconsistent or poorly documented decisions can be hard to defend later.

Good practice includes:

• using consistent criteria (performance, role scope, market benchmarks)
• keeping a written record of why decisions were made
• checking for unintended patterns (e.g. one group consistently receiving lower increases)

4) Your Contract And Policies Matter

If you already have a clear Employment Contract and well-drafted pay review terms, it’s much easier to run salary reviews consistently.

Many businesses also set expectations and process details in a Staff Handbook (for example: when reviews occur, who approves them, and what “good performance” looks like).

5) Be Careful About Freezing Or Reducing Pay

If you’re thinking, “We can’t increase salaries this year - can we freeze pay?” the answer will depend on your employment contracts and any established custom and practice. In many cases, employers can freeze pay - but it’s best to communicate clearly, apply decisions consistently, and check your documents before you confirm anything.

If you’re considering reducing pay (even temporarily), you need to be much more cautious. Salary is a core contractual term, and cutting pay without agreement can trigger breach of contract and other claims. If you’re in that scenario, it’s worth reading up on salary reduction risks and getting advice before you act.

A Practical Framework To Decide Annual Salary Increases (Without Guesswork)

Here’s a structured way to approach annual salary increases in a small business or startup. This helps you move from “gut feel” to a process you can repeat each year.

Step 1: Decide What Your Pay Rise Is Actually For

When founders ask how much a salary should increase per year in the UK, they’re often mixing multiple goals into one number.

Try separating pay changes into three categories:

• Cost-of-living uplift: recognises inflation and retention pressures
• Performance increase: recognises results delivered and behaviours demonstrated
• Market adjustment / promotion increase: recognises the going rate or a step-change in responsibilities

Not every employee needs all three, and you don’t need to apply them all every year. But being clear about the “why” helps you choose the “how much”.

Step 2: Benchmark Roles (Even Lightly)

You don’t need expensive salary surveys to benchmark roles, but you should have some external reference point, particularly for critical roles.

Consider:

• recent hiring data (what candidates are asking for)
• industry norms (startup vs established businesses can differ)
• location and remote arrangements (London vs regional vs fully remote)
• role scope (your “Marketing Manager” may be doing the job of a Head of Marketing)

Founder-friendly approach: Pick 3–5 key roles where retention is vital, benchmark those first, and expand over time.

Step 3: Build A Salary Review Budget You Can Actually Afford

Small businesses often set pay rises based on what feels fair - then discover the total payroll uplift is unsustainable once applied across the team.

Instead, reverse-engineer it:

• Forecast revenue and cash flow for the next 12 months
• Decide what percentage of revenue you want payroll to be
• Set a total “pay review pool” you can afford (including employer NI and pension contributions)
• Allocate increases based on your priorities (critical roles, top performers, compression issues)

This avoids a common trap: giving across-the-board increases and having nothing left for the people you most need to retain.

Step 4: Use Clear Performance Criteria (And Fix Performance Issues Properly)

Linking salary increases to performance is reasonable - but it needs structure.

Ask yourself:

• Are goals documented and realistic?
• Are managers assessing consistently?
• Are you confusing “effort” with “outcomes”?

If performance is not where it needs to be, you’ll generally be on safer ground (and have better outcomes) if you address it directly rather than quietly withholding pay rises without explanation. Depending on the situation, that may involve a structured process like Performance Improvement Plans.

Step 5: Watch Out For Pay Compression

Pay compression happens when new hires come in on higher salaries than existing staff in similar roles, because the market has moved.

This can create retention issues quickly - particularly if long-term team members feel undervalued.

During annual reviews, check:

• do people with similar responsibilities have broadly comparable pay?
• are there clear reasons for differences (experience, performance, scope, tenure)?
• are promotion pathways and pay bands clear enough?

You don’t need perfect “corporate” pay bands, but you do need a logic you can explain.

Communicating And Documenting Pay Reviews (So They Don’t Backfire)

Once you’ve decided on increases, the next risk area is communication. A pay rise conversation can go wrong even when you’re being generous, especially if employees expected more or feel decisions were inconsistent.

Put The Process In Writing

Even a simple written process helps. For example:

• reviews happen annually in a particular month
• the business considers performance, market, and affordability
• not all employees will receive an increase every year
• the business may also award one-off bonuses (where relevant)

If you want to build this properly into your people operations, the details often sit alongside your core documents - like your Employment Contract terms and policies in your Staff Handbook.

Confirm Increases In Writing

A salary increase should be confirmed in writing, with the effective date and the new salary amount. This protects both sides and reduces misunderstandings.

Many employers issue a simple letter or variation confirmation - and it’s worth making sure yours is correctly worded. If you need a starting point for the structure and wording, a Pay Rise Letter approach can help keep things consistent.

Be Careful With “Discretionary” Language

Some employers want to say pay rises are “discretionary” to avoid being locked in. That can be sensible - but only if you actually operate discretion fairly and consistently.

If you promise annual increases, or if you consistently give them year after year in a predictable way, you may accidentally create an expectation that becomes harder to depart from later.

Don’t Rely On Pay Secrecy To Avoid Problems

It can be tempting to discourage salary discussions when you know your pay structure isn’t perfect yet.

But attempting to enforce pay secrecy can create legal and employee relations issues. If you’re thinking about introducing pay confidentiality clauses or policies, you should understand the limits around pay secrecy first.

If You Need To Change Pay Structures, Treat It As A Contract Change

Sometimes a “salary review” also involves changing commission, bonus structures, or pay review dates. These can be contractual terms too.

If you’re changing contractual pay terms, you’ll often need employee agreement and a fair consultation process - especially if changes are unpopular or affect take-home pay.

Where founders get caught out is changing pay arrangements informally and then facing disputes later. If you’re restructuring pay, it’s worth treating it like any other change to terms, and following a careful approach to contract changes.

Key Takeaways

• There’s no single answer to how much a salary should increase per year in the UK - the right approach depends on inflation, market rates, performance, and what your business can sustainably afford.
• You generally don’t have a legal duty to increase salaries annually, but you must comply with National Minimum Wage / National Living Wage and make pay decisions in a way that doesn’t create discrimination or equal pay risks.
• A practical annual review framework is to separate pay changes into: cost-of-living uplift, performance increases, and market/promotion adjustments.
• Document your pay review process and confirm salary increases in writing to avoid misunderstandings and disputes.
• If you’re freezing, reducing, or restructuring pay, be careful - salary is usually a contractual term, and changing it without agreement can create legal risk.

If you’d like help setting up pay review processes, updating contracts, or documenting salary changes, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.