Your SME and the National Living Wage

All you need to know about the increase in the national living wage

From April 2016 the National Living Wage (NLW) will be set at £7.20 for workers aged 25 or over who are not in their first year of apprenticeship. It’s the law and will apply to all UK businesses including yours. It is set to increase annually rising to £9 an hour by 2020.

The NLW is only applicable to workers aged 25 or over. It’s not to be confused with the National Minimum Wage which applies to people aged 24 and under.

The government will be increasing the Employment Allowance by 50% to £3000 to offset the cost of NLW.

This is a change that is welcome but has its challenges

NLW predictions

Recruitment
More than two thirds (77%) of SMEs are concerned that the NLW will make recruitment a challenge, according to a survey by job search engine Indeed (Nov 2015).

Another opinion echoing reservations is that the NLW will make senior level hiring a challenge. The NLW sets a new baseline for wages reducing the salary gap between senior and junior roles preventing people from wanting to take on extra responsibility.

Regional Variations
The NLW is likely to affect Sheffield, Nottingham and Birmingham as these cities have up to a quarter (25%) of employees on low pay, according to a report from the Resolution Foundation.¹

The same report predicts that 28% of workers in Sheffield will receive a pay rise as a result of the NLW. While in London only 14% of workers will see a wage increase.

Pay morale
The NLW will change pay structures. For example, employees with different levels of responsibility will be paid the same. Or alternatively people of the same skill could be paid different wages. This is likely to result in friction in employee relations. An issue which HR will need to address.

1. Paved with gold? Low pay and the National Living Wage in Britain’s cities (January 2016)

Tips for SMEs

Payroll review
Ensure that your hourly rates match the NLW. Ensure that your systems account for dates of birth and adjusts wages accordingly for example when an employee turns 25 they are eligible for the NLW. Check that part-time and casual workers are being paid appropriately.

Recruitment
It may be worth hiring an apprentice to help reduce your wage bill and spread costs.

Contracts
Review your contracts to guarantee that they stipulate that employees will be paid NLW.

Budgets, profits and costs
Assess the cost of higher remuneration on bonuses, pension contributions, holiday and sick pay. It may be necessary to reduce outgoings and, or increase your income. Additionally you may decide to reduce hours or employees.

Changing your business structure
Investing in equipment and automation will reduce the number of employees needed for routine tasks allowing them to focus on people skill-based tasks.

It could be worth embracing remote and flexible working practices to help reduce wage bills allowing your SME greater flexibility.

If your SME needs help understanding how the NLW will affect you then please get in touch with us today to find out more: enquiries@bradfield.co.uk