6 October 2015 | Herpreet Grewal
A significant number of small firms are concerned about the impact the new Living Wage rate for over-25s will have on their businesses.
Many are planning to slow job creation, raise prices or postpone or cancel planned investments to compensate for the higher statutory rate, says research by the Federation of Small Businesses (FSB).
It found that well over a third (38 per cent) of small employers expect the new National Living Wage of £7.20 an hour to negatively affect their businesses when it comes into force in April 2016.
When asked to consider the projected rise in the National Living Wage to at least £9 an hour by 2020, over half (54 per cent) say it would have a negative impact. Just six per cent of businesses think the policy would have a positive effect on their business.
Businesses in the wholesale and retail sector, and those working in accommodation and food services, are most likely to say the National Living Wage will have a negative impact. In addition, businesses in Yorkshire, the West Midlands, Wales, and the South-West are among the most likely to cite a negative effect.
FSB's latest Cost of Employment Index was also published this week. It is a comprehensive model of wage and non-wage costs for small businesses across a range of sectors. The model estimates that for a small retail business with six full-time staff aged 25 or over and earning the current adult minimum wage, the National Living Wage will cost an extra £5,900 a year from April 2016.
Annual labour costs for such a business stand at approximately £127,700. Even after claiming the higher Employment Allowance (which is set to rise to £3,000 next year), these costs are set to rise to £133,600 in April 2016 because of the National Living Wage. In other words, the £3,000 of potential savings to employers from lower national insurance contributions will reduce the £8,900 higher wage costs incurred in this case, but would still require the employer to find nearly £6,000 to cover the additional costs.
This would happen just six months after employers had already increased wages owing to the increase in the minimum wage on 1st October 2015.
When businesses that say they would be negatively affected were asked how they would adapt to the new National Living Wage, just over half (52 per cent) say they would put off hiring new staff while 50 per cent say they would raise their prices.
Other steps businesses plan to take to manage the higher wage level include: cutting staff hours (41 per cent), reducing staff numbers (31 per cent), cancelling or postponing planned investments (29 per cent) and eroding pay differentials by freezing or cutting the wages of higher-paid staff (26 per cent). Almost a third of businesses owners expect to absorb the cost through reduced profits (29 per cent).
John Allan, FSB national chairman, said: "It's important that the independent Low Pay Commission continues to play a central role in setting the minimum wage - and that includes deviating from the government's plan to raise the National Living Wage to over £9 an hour by 2020 - if it becomes apparent that the economy cannot afford it."