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The After Effects of the National Wage Increase

Published: 13 April 2016

On April 1st 2016 the UK Government introduced the National Living Wage (NLW). The pay increase has been well received by many, however some of the after effects have not. Here we look at the effect of the National Living Wage on UK businesses…

By introducing the National Living Wage, the government aims to increase productivity, reduce the amount they pay out in benefits and minimise unemployment. As Sarah O’Connor, Employment Correspondent of FT.Com explained, “The government believes the living wage will prompt employers to invest more in training and technology to make their workers more productive, breaking the UK out of its “low-pay, low-productivity” trap.”

What is the National Living Wage?

The National Living Wage is an attempt by the Government to move from a low wage, high tax, high welfare society to a higher wage, lower tax, lower welfare society. It’s seen as a way to ensure work pays and reduces reliance on the benefits system. The National Living Wage will benefit workers over 25 who are paid the National Minimum Wage.

Who is affected?

Employees:

The National Minimum Wage will affect 1.3m workers, their wages will rise from £6.70 to £7.20 an hour. The Government hope to increase this to over £9 an hour by 2020.

Employers:

Those within retail, hospitality, catering and social care, along with small businesses are most likely to be affected. As explained on FT.com, “The policy’s impact will be felt disproportionately by smaller companies since they employ 35 per cent of the adult workforce but 52 per cent of Britain’s minimum wage workers. It will also be concentrated among certain sectors: hospitality and retail account for 46.5 per cent of all minimum wage jobs, while three in every 10 jobs in cleaning and hairdressing pay the legal minimum.”

The ricochet

Increased costs:

The total rise in employer’s wage costs could reach £4bn, an increase of 17.5%, however, the Government believes businesses will be able to manage the extra costs. Some businesses have already increased the price of their products and services, reduced benefits and cut overtime.

The Office for Budget Responsibility (OBR) warned that 60,000 jobs could be lost as businesses will struggle to cover the costs of increased wages. Worse still, the British Retail Consortium, which represents shops, has claimed that as many as 900,000 jobs could be lost in the sector.

Bigger penalties

: For those who don’t comply with the new National Living Wage, the penalty will be doubled, from 100% of the money owed, to 200%, with a maximum penalty of £20,000 per worker. Employers found guilty can also be disqualified as a company director for up to 15 years.
Increased productivity & stronger economy: Increasing the rate of pay will make employees feel more valued. What’s more, in return for higher pay, businesses can improve employees’ efficiency by providing training. This increase in productivity and job satisfaction is likely to have a positive effect on the economy.

To ensure compliance with the new regulations, follow these four steps:

  1. Check to see if anyone in your organisation is eligible, here.
  2. Take appropriate payroll action. You can find guidance for this here.
  3. Notify staff of any changes.
  4. Ensure staff under 25 are being paid the correct rate. You can find further information here.

Discover more about the National Living Wage here.

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