National Living Wage and What It Means for Small Businesses

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salary slipIn April 2016, the Government introduced the National Living Wage.

The National Living Wage is set at £7.20 per hour, and is the minimum hourly rate that must be paid to over 25s. It replaces the National Minimum Wage for this age group.

Younger employees still receive a National Minimum Wage.

Is the National Living Wage anything more than a name change?

Prior to April 2016, the National Minimum Wage for over 25s was £6.70. Moving to the National Living Wage represented a jump of 50p. From 2010 to 2015, the National Minimum Wage had not risen by more than 20p per year. The National Living Wage was, therefore, a bigger jump than usual.

A Government publication stated that the move to a National Living Wage was intended to change the UK from a ‘low wage, high tax, high welfare society to a higher wage, lower tax, lower welfare society’.

Many have argued that the Government haven’t done enough, because it’s estimated that the amount needed to survive outside London is actually £8.25 per hour, as calculated by the Centre for Research in Social Policy at Loughborough University. In fact, £7.20 was the estimated real living wage back in 2011, when the National Minimum Wage for over 25s was still set at £6.08. Data going back over the past five years suggests that the gap between National Minimum Wage/National Living Wage and the actual living wage calculation is actually getting wider by the year.

What does the National Living Wage mean for small businesses?

If you run a small business, you need to be paying employees over the age of 25 at least £7.20 per hour. This isn’t optional, as the National Living Wage is a legal minimum for that age group.

You will need to keep track of all employees, making sure that everyone is receiving at least the minimum set by the Government. As an employee turns 25, you should be ready to move them immediately to the National Living Wage, or higher. Of course, if you are already paying more than £7.20 per hour then no immediate change is needed.

By 2020, the Government has said that the National Living Wage will be set at £9 per hour. It’s therefore very important to keep track of any further increases.

The National Living Wage is predicted to have a bigger ongoing impact on smaller businesses than larger ones. This is because larger companies often have bigger profit margins, and more money at their disposal.

For a small company with five employees over the age of 25, the rise from 2015’s National Minimum Wage to 2016’s National Living Wage could have meant:

  • A loss of an additional £2.50 per hour
  • A loss of £20 over a typical working day
  • A loss of upwards of £400 per month

Small businesses generally have fewer employees, but will also have a smaller amount of money available to pay the wages. Unless you have a good financial crash mat in place, any changes to income or expenditure will have a considerable impact. Large companies can often absorb these changes more easily.

How should businesses be dealing with the National Living Wage introduction?

If you have already experienced an increase in costs as a result of the introduction of the National Living Wage, or if you’re expecting to experience one as your younger employees reach the age of 25, then the best thing that you can do is be prepared.

Ensure that you have the money available to cover the extra money that you’ll be paying to your employees. The method you use to find this extra money should be fair and non-discriminatory.

George Osborne announced when introducing the plan that it couldn’t ‘be right that we go on asking taxpayers to subsidise through the tax credit system the businesses that pay the lowest wages’. Theoretically, the introduction of National Living Wage was to make businesses pay a fair wage so that benefit claims could be reduced.

The reality might have worked out very differently.

Changes to Existing Staff Pay and Benefits?

B&Q announced that it would cut Sunday pay and Bank Holiday pay, and reduce staff bonuses, in order to provide all members of staff with £7.66 per hour. This would go beyond the National Living Wage requirement, but was a move that was made following its announcement, as a result of predicted losses. After a petition against B&Q’s announcement was signed by almost 145,000 people, the company promised further consultation and assurance that employees wouldn’t lose out.

Other companies have made similar moves, cutting pay and benefits elsewhere to cover the increased standard wage across the board.

Companies of all sizes have had to calculate the cost of the National Living Wage, both now and in the future, to make changes and adjustments in preparation.

Job Losses?

 Job losses were predicted before the National Living Wage was introduced, and research carried out in March found that 1 in 5 employers were planning job losses.

Who will benefit long term?

Early indications are that workers have benefitted from the introduction of the National Living Wage, with more disposable income as a result. Despite this, there are suggestions that all might not be as it seems.

Businesses are, of course, struggling with the changes. The increased wage has also taken many employees out of the working tax credit bracket. In addition, employees may be losing jobs or certain work benefits.

Small businesses may find it hard to adapt to the National Living Wage, which was introduced without much warning and was significantly higher than the National Minimum Wage before it.

Options for employers might include:

  • Cutting back on recruitment – spreading the workload between existing employees, taking on temporary workers or working more closely with those that are self-employed.
  • Shuffling existing teams to maximise efficiency, or providing extra training to the same effect.

Though there is currently no law against reducing benefits such as Sunday and Bank Holiday bonus pay, to compensate for the introduction of the new National Living Wage, it’s unlikely to go down well with workers.

Read our Guide for Small Business and sharpen on the top reasons small businesses fail or succeed.

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