UK businesses could face an increase in the minimum wage of more than 5% next year unless Chancellor of the Exchequer John Healey decides to spare them another painful hike, according to estimates ahead of the budget on Wednesday.

Recruiters said another inflation-busting rise in the National Living Wage for workers aged 21 and over could worsen Britain’s youth unemployment crisis, with firms having been hit by big increases in employment costs in the past two years.

Their warnings come after the Office for National Statistics last week released earnings data used to calculate the statutory pay floor for more than 2 million of the lowest-earning workers. Deutsche Bank said that the Annual Survey of Hours and Earnings could mean the main minimum-wage rate rises 4.6% in April 2027, while Morgan Stanley warned the increase could be as much as 5.5%.

That would mark an unexpected acceleration from this year’s 4.1% boost to £12.71 ($16.96) per hour and be much higher than the 3.7% estimate the Low Pay Commission touted earlier this year.

It would also likely exceed the rate of inflation, which economists reckon will average around 3% in 2027, potentially making it harder for the Bank of England to bring the pace of price increases under control.

Maxine Bligh, interim chief executive of the Recruitment & Employment Confederation, said the scale of increases to the minimum wage has been a factor holding back hiring, particularly for small businesses.

“It’s part of that picture of it making a really challenging environment in terms of entry-level employment costs,” she said. “The commission needs to take a really careful, considered view when it comes to particularly getting more young people into work, or balancing that rate with the cost pressures that businesses are under.”

The government has also instructed the Low Pay Commission to close the gap between the 21-and-over rate and the lower rate paid to 18 to 20-year-olds. The government has indicated that it may slow the equalization process this year over concerns the policy is driving up youth unemployment. Joblessness among those aged 16 to 24 rose above 16% earlier this year, its highest in more than a decade.

The Low Pay Commission uses the ASHE survey to calculate its recommendation and aims to keep the pay floor at two-thirds of median hourly earnings. However, it is also told to take the strength of the labor market into its considerations, which could mean the chancellor opts for a smaller increase.

It leaves Healey in a tricky situation after he vowed to ease cost pressures for both households and businesses. Firms have complained about the impact of hikes to the minimum wage and employer payroll taxes, along with increased employment protections. Tax data shows that firms have shed more than 180,000 payrolls since Labour’s first budget in October 2024.

Lee Chant, managing director at ManpowerGroup UK & Ireland, highlighted the risk of further boosting the number of young adults who are not in education, employment or training.

A sharply higher minimum wage would also have ramifications for the BOE, which is trying to contain the inflationary impact of the Iran war energy shock. It fears that workers will try to bid up wages, keeping inflation high for a prolonged period.

There is evidence that the minimum wage decision affects workers further up the pay scale as businesses look to maintain the difference with the UK’s pay floor.

“We do think the NLW decision is one of the most important moments of the budget, as we think a material surprise could move pay settlement surveys upwards for the year ahead,” said Bruna Skarica, chief UK economist at Morgan Stanley.

An increase significantly above 4% “would be a moderate drag on employment growth and would be, we think, seen by the BOE as adding to risks of second-round effects materializing following the energy shock,” she added.