Pay raise guide: when and how much to give employees

Published Saturday 11 April 2026

Table of contents

• What is a pay raise?
• Types of pay raises
• Give a raise to retain your best employees
• Five good reasons to give a raise
• Choose the right time
• What's the right amount?
• How to calculate a pay raise
• Track performance with data
• There's more to life than money
• Managing pay raises with the right tools
• FAQs on pay raises

Key takeaways

• Time pay raises strategically by being proactive rather than reactive, giving immediate recognition when employees deliver results instead of waiting for annual reviews or until they ask for increases.
• Use data-driven decisions to identify deserving employees by tracking performance metrics, sales figures, and key performance indicators rather than relying solely on subjective assessments.
• Calculate sustainable raise amounts using industry benchmarks as a starting point, with UK averages around 5.2% annually, then adjust based on individual performance, market demand for their skills, and your business's financial capacity.
• Consider non-monetary alternatives when pay raises aren't feasible, such as flexible working arrangements, extra holidays, professional development opportunities, or practical support during high inflation periods.

What is a pay raise?

A pay raise (also called a pay rise in the UK) is an increase in an employee's salary. Employers give raises for several reasons:

• recognising strong performance
• rewarding new responsibilities
• keeping pace with the cost of living

Getting raise decisions right is essential for retaining your best people.

Types of pay raises

Understanding the different types of pay raises helps you choose the right approach for your team and budget. Most small businesses use a combination of these methods.

Discretionary pay raises

Discretionary raises are voluntary increases you choose to give. You control the timing, amount, and criteria. These are the most common type for small businesses because they offer flexibility to reward performance when it makes sense for your budget.

Contractual pay raises

Contractual raises are increases specified in employment contracts or agreements. Once committed, you're legally obligated to provide them. Review contracts carefully before signing to ensure any promised raises are affordable long-term.

Merit-based pay raises

Merit raises reward individual performance and achievement. They're typically tied to meeting or exceeding specific goals, key performance indicators (KPIs), or performance review outcomes. This approach motivates employees by directly linking pay to results, though research suggests the motivational effects of pay for performance (PFP) can taper off quickly beyond a certain amount.

Cost-of-living adjustments

Cost-of-living adjustments (COLAs) help employees maintain purchasing power as prices rise. Many businesses use the inflation rate as a baseline, and government policy reflects this with the National Living Wage set to rise by 4.1%. These raises aren't tied to performance but help retain staff during periods of high inflation.

Promotional pay raises

Promotional raises accompany increased responsibilities or a new job title. When an employee takes on a bigger role, their pay should reflect that change. The amount typically depends on how significantly their responsibilities have expanded.

Give a raise to retain your best employees

Pay raises help you keep your best people. Pay is the main reason 48% of employees join and stay with a company.

When employees feel fairly compensated, they experience:

• Performance recognition: acknowledgment that their good work matters
• Professional value: confidence that their role is important to the business
• Competitive parity: assurance they're keeping pace with market rates

To keep your best employees, pay them what they're worth. Go beyond starting salaries and inflation adjustments by rewarding improved performance and new skills.

Research shows over half of employees would consider switching jobs for better pay. Retaining your team saves recruitment costs and boosts morale. The key is combining people skills with data to make fair, affordable decisions, particularly when national data reveals issues like a median pay gap of 11.8% between genders.

Five good reasons to give a raise

Not every situation calls for a pay raise. These five scenarios typically justify increasing an employee's salary.

When identifying who deserves a raise, note that consistent high performers aren't always the most vocal. Quieter team members may deliver exceptional value without actively requesting recognition.

1. To recognise consistent hard work and achievement

Consistently high performance deserves a reward. A one-off achievement might not justify a raise on its own, but sustained excellence does. Merit pay is the most common form of performance-related pay for professional and technical employees.

2. For a positive impact on your workplace

Some team members lift morale through their positive attitude and sociability. What they contribute improves teamwork and productivity across your business, which is worth rewarding.

3. For a unique talent or ability

If someone on your team would be difficult to replace, a raise could encourage them to stay. In some cases, increasing pay to retain a hard-to-replace employee may cost less than recruiting and onboarding a replacement.

4. For loyalty and long service

Long-service-based pay increases are less emphasised in some modern reward strategies, which often place more weight on market rates, skills, and performance. But if an employee has been with you through some tough times and helped your business survive, you might think about giving them a raise.

5. For taking on new responsibilities

In small growing businesses, people's roles can change quickly. Someone might take on a task to help you out during a busy time and, next thing you know, that job's become their permanent responsibility. Don't lose sight of how people's jobs are evolving.

Choose the right time

Strategic timing maximises the impact and cost-effectiveness of employee raises. The best time to give a raise depends on your business cycle, employee performance, and market conditions.

Consider these approaches:

Move beyond annual reviews

Annual reviews can encourage short-term performance spikes right before evaluation periods. On-the-spot raises work differently. They provide immediate recognition when employees deliver results, which keeps motivation consistent throughout the year.

Be proactive, not reactive

Proactive raises show you value employees before they question their worth. When someone asks for a raise, they may already be considering other opportunities.

This approach also ensures you reward deserving employees who don't advocate for themselves. Quieter team members often deliver consistent results without actively requesting recognition.

Monitor market conditions

Track competitor salaries and industry demand for your employees' skills. If market rates for a role have increased significantly, your current pay may no longer be competitive.

Resources like Office for National Statistics (ONS) earnings data help benchmark appropriate compensation levels for similar roles in your region and sector.

What's the right amount?

Set pay raises you can sustain. Overly generous raises create expectations you may not meet in future years. Raises that are too small risk losing your best people to competitors offering more.

Industry benchmarking

Recent ONS data shows a 5.2% annual average salary increase in the UK. However, this varies by sector and performance level.

Research average wage increases in your specific industry and region. UK raises have typically ranged from 2% to 5% annually, depending on economic conditions.

Individual considerations

Use industry averages as your starting point, then adjust based on:

• Employee performance: their contribution level and consistency
• Market demand: how sought-after their specific skills are
• Financial capacity: what your business can sustainably afford

How to calculate a pay raise

Once you've decided on a raise amount, you need to calculate the specific numbers for your payroll. These formulas help you work out percentages and amounts accurately.

Basic pay raise formula

To calculate a raise percentage from an amount:

Raise percentage = (Raise amount ÷ Current salary) × 100

Calculating percentage from amount

If you're giving a £1,500 raise on a £30,000 salary:

£1,500 ÷ £30,000 × 100 = 5% raise

Calculating amount from percentage

If you're giving a 4% raise on a £35,000 salary:

£35,000 × 0.04 = £1,400 raise

The new salary would be £35,000 + £1,400 = £36,400

Example calculations

• 3% raise on £28,000: £28,000 × 0.03 = £840 (new salary: £28,840)
• 5% raise on £42,000: £42,000 × 0.05 = £2,100 (new salary: £44,100)
• £2,000 raise on £32,000: £2,000 ÷ £32,000 × 100 = 6.25%

Using online calculator tools

For quick calculations, online salary increase calculators can help. Enter the current salary and either the raise amount or percentage to see the results. Factor in how raises affect National Insurance contributions and pension costs when budgeting.

Track performance with data

Data-driven decisions improve raise timing and fairness by revealing each employee's measurable contribution to your business. The right tools help you identify who deserves recognition and when.

Sales and customer data:

• Point-of-sale systems: track who works during peak business periods
• CRM software: reveals who generates leads, closes deals, and grows accounts

Financial and performance tracking:

• Payroll software: tracks current compensation and raise history
• Performance dashboards: identify which business areas drive the most profit

Set key performance indicators (KPIs) for each team member:

1. Define what success looks like for their role
2. Discuss those KPIs so they know what's expected
3. Review progress regularly to identify raise-worthy performance

Numbers tell part of the story. You'll also need to understand how your employees are feeling through regular conversations.

There's more to life than money

If you can't offer a pay raise right now, you can still show appreciation in other ways. Research suggests companies often under-estimate intrinsic job features that employees value. Non-monetary rewards often cost less while still boosting morale and retention.

Cost-effective alternatives:

• Flexible benefits: offer extra holidays or flexible working arrangements
• Experience rewards: provide restaurant vouchers, team events, or professional development
• Regular recognition: give weekly treats, public acknowledgment, or career advancement opportunities

These options often cost less than pay raises but still show you value your team.

During periods of high inflation, consider practical support such as:

• financial guidance or budgeting resources
• subsidised commuting costs or travel loans
• access to employee discount schemes

Managing pay raises with the right tools

Pay raises help you retain your best people, boost productivity, and stay competitive in your market. The right tools make compensation decisions easier to manage.

Use payroll software to track compensation history and ensure accurate payments. Performance dashboards help you identify high-value employees based on measurable contributions.

Get one month of Xero free to make paying your team simple and support your business growth.

FAQs on pay raises

Here are answers to some common questions about giving a pay raise.

What is a typical pay raise in the UK?

UK pay raises typically range from 2% to 5% annually, with recent averages around 5%. The right amount depends on your industry, the employee's role, and your business's performance. Many employers use the inflation rate as a baseline for cost-of-living adjustments.

Should I give everyone the same pay raise?

No. Raises should reflect individual performance, responsibilities, and skill development rather than being identical across the team. Tying raises to specific achievements motivates employees and rewards genuine contribution. Fairness means consistent criteria, not identical amounts.

Is a pay raise the only way to reward employees?

No. If a pay raise isn't possible, consider alternatives such as:

• extra time off or flexible working hours
• professional development opportunities
• one-off bonuses or vouchers

These benefits can improve morale and retention without increasing your ongoing salary costs.

What's the difference between discretionary and contractual pay raises?

Discretionary raises are voluntary increases you choose to give based on performance, market conditions, or retention needs. Contractual raises are legally required increases specified in employment contracts or collective agreements. Most small business raises are discretionary, giving you flexibility over timing and amounts.

How do I calculate a pay raise percentage?

Divide the raise amount by the original salary, then multiply by 100. For example, a £1,500 raise on a £30,000 salary equals 5% (£1,500 ÷ £30,000 × 100 = 5%). To calculate the raise amount from a percentage, multiply the salary by the percentage as a decimal (£30,000 × 0.05 = £1,500).