The new National Living Wage: pros and cons for SMEs
17th March 2020
2016 announced the introduction of the new National Living Wage, which is expected to have both positive and negative effects on SMEs throughout the UK.
Currently in the UK all employees are entitled to the National minimum wage, and workers don’t need a written contract to be eligible for it.
The National Minimum Wage increased to £6.70 per hour in October 2015 but will be increased again, with the new premium, to £7.20 in April 2016 – and predicted to rise, in increments, to £9 per hour by 2020 for workers aged 25 and over.
Upwards of a million workers in the UK are set to benefit from this latest 50p increase.
National Living Wage, Living Wage and National Minimum Wage, what’s the difference?
It’s compulsory to pay any worker aged 25 and over the new National Living Wage, whilst the National Minimum Wage will still apply to those under 25.
The National Living Wage is not to be confused with the Living Wage, which is a voluntary hourly rate set by the Living Wage Foundation. It’s calculated against the cost of living, which stands at £8.25 outside of London, and is updated annually.
The new National Living Wage will be a ‘premium’ on top of the existing national minimum wage, for workers aged 25 and over, and employers must pay this.
So, to recap:
National Minimum Wage - The minimum wage for all workers.
National Living Wage - An addition to the current National Minimum Wage for workers aged 25 and over.
Living Wage - A voluntary hourly rate set independently and updated annually, based on the cost of living.
But what effect will this have on small businesses?
A survey by the FSB found that 38% of SME employers expect the new National Living Wage to have a negative impact on their business processes, with just 6% anticipating a positive impact.
Over half of those survey thought the projected rise to £9 an hour by 2020 will have an additional negative effect, which in turn led to many saying they’d be put off hiring new staff and would be forced to cut staff hours. They’d also consider raising prices in order to balance the books. Almost a third of businesses owners expected to absorb the cost through reduced profits (29%).
However, it’s not all doom and gloom for businesses, with many positive effects expected to come from the increment, too. To give you the full picture, we’ve compiled a list of some of the main pros and cons for small businesses that the National Living Wage is expected to bring.
- Increase in employee motivation and productivity
- Better employee retention and fewer sickness absences
- Monetary benefits for business through a reduction in recruitment and training costs caused by above
- The Office for Budget Responsibility (OBR) says the new living wage would have only a “fractional” effect on jobs – by 2020 there would be 60,000 fewer jobs as a result of it; but almost one million new jobs formed.
- The OBR estimate that the cost to businesses will amount to just 1% of profits.
- Increased overheads, putting pressure on employers
- Squeeze cash flow, making growth a challenge
- Combined with new pension auto-enrolment this adds a large financial burden to SMEs
- The National Living Wage will cost an extra £5,900 a year from April 2016 for a small retail business with six full time staff aged 25 or over and earning the current adult minimum wage
- The FSB is cautioning policy-makers that although small business confidence has been strong in the past few years, its recent research shows a marked cooling in confidence since the Summer Budget. It says it is likely that the new Living Wage, as well as changes to the tax treatment of dividends, has contributed to this dip in confidence.
It’s essential that you make sure your business is up to date with policy as non-compliance with the new National Living Wage could result in a criminal offence and a financial penalty. Any employer found guilty may also be disqualified as a Company Director for up to 15 years. So make sure you know what you need to do.
Firstly, you will need to make sure you are paying all eligible staff correctly.
From 1st April 2016 the National Living Wage will roll out to all those who turn 25 in the proceeding months, and they will instantly become entitled to the new wage on the date of their 25th Birthday. This has huge implications for your administrative procedures, giving a new importance to implementing an accurate and rigorous record keeping process that will make it easier to manage the already complex system.
What next? For full information on the National Living Wage and what you need to do, read the Government advice page, here.