What is a cost-of-living pay rise?

The UK is currently facing a significant cost-of-living crisis, with millions of working people struggling to keep up with rising household bills and everyday expenses. For the lowest-paid workers, the increased cost of essentials like food, energy and housing means that even full-time employment may not be enough to afford a decent standard of living.

Because of this, businesses may benefit from offering their employees a cost-of-living pay rise. This can not only attract new candidates, but also potentially prevent top talent from leaving to find higher-paid roles that cover their living costs.

How the cost-of-living crisis could be affecting businesses

As well as affecting individuals, the COL crisis may be having far-reaching consequences for economic growth. When workers are unable to cover their basic costs, they have less money to spend on local high streets and businesses, which can slow down growth and impact local economies.

Employers, the government and trade unions all contribute to addressing the cost-of-living crisis. By working together to ensure fair wages, meaningful benefits and targeted support, they can help workers afford to live and work in their communities. This can make both a real difference in people’s lives and support the overall health of the UK economy.

Why is assessing wages for cost-of-living pay rise important?

Regularly assessing wages for a cost-of-living pay rise contributes to ensuring that employees, especially lower-paid workers, can afford to live and work in their local area. The cost of living can vary dramatically across the UK and a one-size-fits-all approach to pay may leave some workers struggling to cover their household bills, food and transportation costs.

By carefully calculating and adjusting pay to reflect these differences, employers can help their employees maintain a decent standard of living, even as living costs rise. This is particularly important during a cost-of-living crisis, when lower-paid workers are most at risk of falling behind.

National minimum wage considerations

The national minimum wage is often a safeguard for the lowest-paid workers in the UK, ensuring a basic level of pay for millions of employees. However, the minimum wage does not always keep pace with the real cost of living, especially in high-cost areas like London.

What is the national living wage?

Employers may be required by law to pay the National Living Wage (NLW) to all employees, which can vary depending on age. According to the UK government, as of April 2026, the current rate for this is £12.71 for employees over 21. The minimum wage may still apply for workers under 20.

For many workers, the national living wage or minimum wage is not enough to cover their living costs, which is why employers may be increasingly encouraged to pay the real living wage. The real living wage, calculated by the Living Wage Foundation, reflects the actual cost of living in different parts of the UK and goes beyond the statutory minimum.

The real living wage vs the national living wage

By paying at least the real living wage, employers can ensure their employees are fairly compensated and able to cover their basic expenses, making a significant difference in their quality of life. This approach not only benefits workers but also helps businesses attract and retain staff and supports the wider economy. For more information about the Living Wage, please visit the UK government website.

Base salaries across the UK

Indeed Salaries can help you find out what the average base salary is for employees in different parts of the UK. For example, a data analyst in London’s average wage is available here, with the boroughs offering the highest salaries including West London, East London, Enfield and Bromley. This is because the average base salary corresponds to the COL for these parts of London.

You might find it suitable to implement a cost-of-living pay rise so that your employees can afford to live close to where they work. Basing salary on the COL of where your employees live and work can be attractive to prospective candidates in the local area and improve employee retention.

How can I work out what the COL is for my area?

To work out the COL for your area, you may consider which expenses your employees will need to factor into their day-to-day living. Cost of living, therefore, includes factors such as:

• Rent
• Council tax and other taxes
• Gas and electricity bills
• Healthcare
• Travel costs
• Food
• Entertainment

How do I decide what my employee’s wage or salary should be in a high COL area?

You might want to set an employee’s base pay in line with the cost of living in their area. Base pay is any payment that your employee receives before additional benefits, such as commission, overtime or bonuses. You may consider offering your employees this based on an hourly, weekly, monthly or annual rate.

London Living Wage

As London is a high COL area, many employers choose to pay their employees the London Living Wage. According to the Greater London Authority, the London Living Wage is set at £14.80 per hour and covers all the boroughs included in Greater London.

Businesses do not have to pay the London Living Wage, but doing so may make them more attractive to prospective top candidates because it can help to cover the more basic expenses of living in London.

Cost-of-living adjustments

You might also want to offer a cost-of-living pay rise if the cost of living has increased in your area. You can award this pay rise to an employee’s overall income, which can include their base salary and other employee benefits.

Keeping up to date with market changes

Market rates are constantly changing, so it can be a good idea to continuously research them to ensure you are awarding pay rises in keeping with current rates. If you need guidance on how to communicate a pay raise effectively, consider reviewing best practices to ensure clarity and a positive experience for your employees.

Offering additional benefits for high COL

You can also help employees compensate for a high COL area by offering perks such as free travel, food vouchers and free entertainment tickets. Alongside a pay rise, perks can help increase employee retention rates.

Increasing employees’ revenue contributes to helping them manage rising bills and living costs. These changes may continue to influence the job market and living standards in the coming months.