Budget 2026: what the National Living Wage rise and VAT changes mean for Leicester's labour-intensive businesses

Leicester's economy leans on businesses where people are the biggest cost: garment and knitwear makers, food producers, packaging and light engineering firms, and the shops, restaurants and wholesalers along Belgrave Road and the city centre. For those firms, the parts of Budget 2026 that matter most are not the headline reliefs but the wage rise in April 2027 and a set of VAT changes, some immediate and some phased over the next three years. This piece sets out what changes, who it affects, and how those costs feed through to the trading profit a lender looks at when you apply to buy your premises.

The wage rise: 3.9% from 1 April 2027

The Budget confirms that "On 1 April 2027, the National Living Wage will increase by 3.9% to £13.21 per hour" (Budget 2026, para 6.128). The other rates rise by the same percentage:

Rate from 1 April 2027	Hourly or daily rate
National Living Wage	£13.21 an hour
18 to 20-year-olds	£11.27 an hour
16 to 17-year-olds and eligible apprentices	£8.31 an hour
Accommodation offset	£11.53 a day

Source: para 6.128.

The Treasury puts the rise as "equivalent to an increase of £910 in the gross annual earnings of a full-time worker on the National Living Wage" and expects it to benefit "around 2.3 million workers" (para 3.18).

Two points are easy to miss. First, the £910 is the change in gross pay only. Employer National Insurance and pension contributions sit on top of it. The Budget says there is "no increase to the headline rates of ... National Insurance contributions" (PDF p.11), but it gives no figures for employer rates or thresholds, so check your own payroll costs with your accountant rather than assuming nothing moves. Second, the rise rarely stops at the minimum. When the floor goes up, supervisors and skilled staff usually expect their differential to be kept, so the real cost for a manufacturer can be higher than the minimum wage bill alone.

Help with hiring, and other employment changes

The Budget confirms two hiring incentives announced in the spring: "the £3,000 Youth Jobs Grant for businesses hiring eligible young unemployed people" and "a £2,000 apprenticeship hiring payment for new young apprentices taken on by non-levy paying employers (typically small and medium-sized enterprises) in England" (para 5.22). For a Leicester food or textile business taking on young staff, these can soften the first-year cost of hiring, though they do not offset the permanent wage rise.

Other measures worth noting:

• Visa salary thresholds. From spring 2027 the government is "reducing occupation-specific minimum salary thresholds from the median to the 25th percentile" (para 6.94). Firms that sponsor skilled workers should check what this means for roles they recruit.
• Mileage. The tax-free mileage rate is made permanent at "55p for the first 10,000 miles and 35p per mile for mileage above 10,000 miles" (para 6.213).
• Benefits in kind. Mandatory payrolling of benefits in kind is delayed, with the first stage from 6 April 2027 and the rest from 6 April 2028 (Table 6.1 item 94).

VAT: no rate rise, but real changes for sellers

The Budget keeps its commitment to "no increase to the headline rates of income tax, National Insurance contributions, or VAT" (PDF p.11). It does not mention the VAT registration threshold. The changes are about who collects VAT and how.

Online marketplaces will collect VAT on UK sellers

This is the change most relevant to Leicester's textile, clothing and homeware firms that sell online. "From October 2027 ... Online marketplaces will be responsible for collecting VAT on sales by UK VAT-registered businesses and any other UK business with a minimum annual sales threshold per platform of £90,000" (para 6.154). The rules do not apply to "non-business (i.e. personal) sales, second-hand goods, or business-to-business transactions".

In practice, the platform will take the VAT on your marketplace sales before paying you. If you are already VAT registered and accounting properly, the main effect is on cash flow and bookkeeping: money arrives net of VAT and your returns need to reflect sales where the marketplace has already accounted for it. If you sell more than £90,000 a year on one platform without charging VAT, your prices will effectively rise from October 2027. The Treasury says "The money raised from this policy will be reinvested into the high street through reductions to business rates" (para 2.44).

Other VAT changes

• Cross-border services. "From April 2027, the reverse charge on cross-border supplies of services will be restricted to VAT-registered businesses" (para 6.183). Non-registered UK firms buying services from overseas suppliers may start being charged VAT by those suppliers.
• Till systems. Mandatory software standards are coming for point-of-sale systems "to tackle electronic sales suppression", with a technical consultation in summer 2027 (para 6.164). Retailers and restaurants may need to update or replace tills.
• E-invoicing. VAT invoices must be issued "in a specified electronic format from 1 April 2029" (para 6.145).
• Direct debit. Businesses will need a direct debit instruction for VAT and PAYE return liabilities "from April 2029" (para 6.148).

None of these is a large cost on its own. Together they mean software spending and some extra admin time over the next three years.

How the costs reach your borrowing

When you apply for an owner-occupier commercial mortgage, the lender wants to see that your business's trading profit covers the loan repayments with a comfortable margin. Wages are usually the largest cost above that profit line, so a wage rise flows straight into the figure the lender tests, unless you pass it on in prices or offset it with productivity.

Illustrative example: a Leicester knitwear manufacturer employs 30 full-time staff on the National Living Wage. Using the Treasury's £910 figure, the April 2027 rise adds about £27,300 a year to gross pay (30 x £910), before employer National Insurance and pension costs. If the business made £300,000 of trading profit before interest, tax, depreciation and amortisation, the same business with no price change would make about £272,700. If a lender wanted that profit to cover the annual mortgage payment 1.5 times, the largest payment it could support would fall from about £200,000 to about £181,800 a year. The figures are for illustration only; every lender sets its own tests.

The lesson is not that the business cannot borrow. It is that the application should show the lender you have already accounted for the wage rise, and what you are doing about it.

What to do now

1. Cost the April 2027 increase properly. Work out the extra gross pay for every employee on or near the minimum rates, add employer National Insurance and pension costs, and decide how far up the pay scale differentials will move.
2. Decide on pricing. If your contracts allow price reviews, plan them now. Lenders are reassured when a business can show it has passed cost increases on before.
3. Check your marketplace sales. If you sell through online platforms, work out your annual sales per platform and how the October 2027 change will affect cash flow and returns.
4. Plan software upgrades. Budget for till, invoicing and accounting software changes ahead of the 2027 to 2029 deadlines.
5. Prepare forecasts that include all of this. If you plan to buy premises in the next 18 months, give the lender a forecast that already includes the higher wage bill and VAT changes. It makes the case more credible.

Key dates

• April 2027: reverse charge on cross-border services restricted to VAT-registered businesses (para 6.183)
• 1 April 2027: National Living Wage £13.21; 18 to 20-year-olds £11.27; 16 to 17-year-olds and apprentices £8.31 (para 6.128)
• 6 April 2027: first stage of mandatory payrolling of benefits in kind (Table 6.1 item 94)
• Spring 2027: lower occupation-specific visa salary thresholds (para 6.94)
• October 2027: online marketplaces collect VAT on UK sellers over £90,000 per platform (para 6.154)
• April 2029: e-invoicing and direct debit for VAT and PAYE (paras 6.145 and 6.148)

Brought to you by Business Mortgages Broker

This article was written by Business Mortgages Broker, which arranges owner-occupier business mortgages for UK trading companies. Founder Matt Lenzie has 25 years in financial services, raising debt and equity, and has arranged around £400m of property finance. If you are a Leicester business owner thinking about buying the building you trade from, read the Business Mortgages Broker guide to owner-occupier business mortgages in Leicester.

Source: HM Treasury, Budget 2026 (HC 726), 28 October 2026. This article is general information, not tax or financial advice.