The National Living Wage and the SME

The National Living Wage and the SME

New legislation came into the UK on 1st April 2016 - National Living Wage - which means that all employees aged 25 or over will legally be entitled to at least £7.50 per hour.  To keep up with the rising costs of living, 3,500 UK business also subscribe to the real Living Wage, which is voluntary, but these companies believe that their employees deserve more.  These Real Living Wage rates are paid at £8.75 (UK) and £10.20 in London from November 2017.   

The National Living Wage is also expected to increase to £9.00 per hour by 2020.  Whether you are paying National Living Wage or the real Living Wage, as employers you can expect big pay rises over the next 3 years, so what can you do to cater for the National Living Wage (NLW) as an SME?

Preparing for the National Living Wage (NLW)

There are certain steps the Government is encouraging businesses to take in preparation for the new law which includes:

  1. Checking the employment status website to see who is eligible in your business
  2. Ensuring you take the correct payroll action – guidance is provided here
  3. Accurate record keeping and payroll management
  4. Informing all staff of any change to their wages

You may also want to know exemptions to the National Living Wage, a full list of which is listed here.

How do you compensate for the higher wage bill?

There is a lot of talk and opinion about the impact this new wage bill will have on businesses and as an SME you may be wondering how you are going to cope with such a large increase.

It may be some consolation to know that the Office for Budget Responsibility (OBR) has estimated that the cost of the NLW will amount to 1% of profits for businesses and to help offset the cost, the Government announced it is cutting Corporation Tax to 19% in 2017 and 18% in 2020.  It is also cutting National Insurance Contributions for smaller companies too but there is an opinion that this 1% figure is only valid if UK productivity is boosted.

According to a Resolution Foundation and CIPD survey, 3 in 10 employers are planning to recoup their costs with increased productivity, but although vital, we think the wider implications of the wage bill may make it difficult for companies to grow. Labour productivity has not increased in the last 7 years (mainly due to low investment since the recession) and the NLW increase to £9 per hour by 2020 is steeper than we have seen since the introduction of the minimum wage in 1999.

How will you deal with it?  The CIPD survey also reported that, in addition to increasing productivity, to compensate for the plan companies will be accepting lower profits (22%), reducing overtime and bonuses (16%) and raising prices (15%).

There is a lot to think about as we enter into unchartered territory and you may not be able to radically improve your productivity or compete on wages.  However, if this new wage bill does affect you, it will undoubtedly feature round your boardroom table and it is crucial consider your individual company strategy on how your business is going to deal with this hike.

Unfortunately, there are no-one-size fits all solution but areas such as increased investment in training and improving staff performance, reducing staff retention and lowering absentee rates can go some way to help offset the increase in payroll costs.  You may also benefit from reviewing your cost per hire ratio and the ROI of the initiatives that you use to attract staff to your brand and your business.


It is also worth noting that any company which fails to comply with National Living Wage will receive a maximum penalty of £20,000 per worker and a possible disqualification from being a company director.

Finally, if you do research the National Living Wage don’t confuse it with the Living Wage which is a voluntary Living Wage rather than a compulsory one. If you have more questions about the National Living Wage and how it will impact you, visit the ACAS website.

We don’t claim to have all the answers for you and hopefully, the squeeze won’t be too tight - maybe you are one of the 41% of businesses that claim the bill will have no effect on?

If you are looking to reduce the costs of attracting talent to your business though, we do know what we are talking about and we can help you with our £269 recruitment service.  We work hard to ensure that every advert you place with us will be seen by as many applicants as possible - so you can make sure your budget goes even further and hopefully offset some of these impending wage increases.

You may also like these articles: