By Anjana Trivedi, Associate Director and Tax Specialist, RA Accountants

When the National Living Wage increased to £12.71 an hour in April 2026, care home operators could model the likely impact. Five months later, they can begin measuring it.

The 4.1% increase represented a further rise in the wage floor for a sector already facing significant workforce and funding pressures. With several months of payroll and management information now available, the focus should be shifting from what the increase might cost to what it is actually doing to staffing costs, margins and cash flow – and what that means for planning into 2027.

The impact goes beyond £12.71

Adult social care is particularly exposed to changes in the National Living Wage because so many employees are paid at or close to the statutory minimum. Analysis highlighted by the Nuffield Trust found that almost a quarter of the sector’s workforce was paid within 10p of the National Living Wage.

But the financial impact isn’t limited to increasing the lowest hourly rate.

Pay differentials matter. When the wage floor rises, the gap between care workers and more senior roles can narrow. Maintaining appropriate differentials for senior carers, team leaders and other roles can add further pressure to payroll.

On-costs matter too. Employer National Insurance and pension contributions mean the total employment cost of a pay rise can be greater than the headline wage increase alone.

Where homes rely on temporary staffing, higher wage costs can also feed through into agency rates, adding further pressure for operators managing vacancies, sickness or fluctuating staffing requirements.

Four months into the new rate, operators should now be able to see much of this impact in their actual payroll data.

The funding gap hasn’t disappeared

The challenge is that higher costs cannot always be passed through easily to fees.

Nuffield Trust analysis of 2025/26 showed care home fees increasing by around 4.9%, against underlying cost increases estimated at approximately 9–10%. While those figures relate to the previous financial year, they illustrate the funding pressure many operators were already carrying into April 2026.

The difference between local authority and private fee levels also remains significant. The Health Foundation reports that self-funders pay an estimated 41% more on average than local authorities for care home places.

For operators with a mixed funding base, understanding profitability by funding stream is therefore increasingly important. A high occupancy rate alone doesn’t necessarily mean a home is delivering the margin required to sustain staffing, investment and quality.

What are your numbers telling you now?

The financial questions in September 2026 are different from those being asked before April 2026.

What is the fully loaded cost of a staffed hour once employer costs and pay differentials are included? How does actual agency expenditure compare with budget? What occupancy level is required to sustain the home’s current staffing model? And what margin is being generated across local authority and self-funded placements?

What Does This Mean in Practice?

To illustrate the impact, consider a care home employing 20 care and support staff working an average of 37.5 hours per week. This represents approximately 39,000 staffing hours per year.

A seemingly modest increase of just £1 per hour in fully loaded employment costs (including wages, employer National Insurance and pension contributions) could increase annual staffing costs by approximately £39,000 per year.

For many care homes, this increase must be absorbed before considering further cost pressures such as agency staffing, utility costs, food inflation, regulatory compliance requirements and ongoing maintenance expenditure. Understanding whether current fee levels and occupancy rates can support these additional costs is therefore essential.

Anjana, Associate Director and Tax Specialist at RA Accountants, says:

“The National Living Wage increase needs to be considered as part of the wider financial picture, rather than as a payroll percentage in isolation. Care home operators now have several months of actual data to assess what is happening to employment costs, agency spend, cash flow and margins. Understanding that position now gives owners a much stronger basis for decisions around fees, staffing, investment and their financial planning for 2027.”

These are finance questions before they are HR questions.

“Effective management accounts should do more than report historical profits. They should enable operators to monitor occupancy levels, payroll as a percentage of income, agency expenditure, cost per occupied bed, profitability by funding source and short-term cash flow requirements. Reviewing these measures regularly allows management to identify financial pressure early and take corrective action.”

Planning ahead to 2027

The £12.71 National Living Wage is now part of the cost base, but further change is already on the horizon.

The 2027 National Living Wage has not yet been confirmed. Current Low Pay Commission estimates indicate that maintaining the Government’s target could require a rate of between £13.02 and £13.34 from April 2027, although the final rate may differ.

With the Autumn Budget taking place on 28th October 2026, attention will also turn to any announcements affecting employment costs, social care funding and the wider operating environment.

Rather than waiting for future costs to be confirmed, now is the time to use year-to-date figures to revisit budgets and forecasts, stress-test different wage and occupancy assumptions, and understand what further cost increases could mean for margins and cash flow.

At RA Accountants, we work with care home businesses to understand the financial performance behind their operations and plan for what comes next.

Following the Autumn Budget, we will provide an update on the key announcements and what they could mean for financial planning into 2027.

If you would like to understand what the 2026 National Living Wage increase is doing to your care home’s margins – and prepare for the changes ahead – speak to our care home team.

Disclaimer

This article is for general information purposes only and does not constitute accounting, tax, financial or professional advice. Individual circumstances vary and the financial and regulatory landscape may change. Professional advice should be sought before taking, or refraining from taking, action based on the information contained in this article.