The UK’s national living wage will increase by 30% to £7.50 starting April 2017. The increase is expected to benefits millions of workers aged 26 years and above. The minimum amount of money earned by British workers before tax will stand at £11,500 as a result of the increase. Workers aged 25 years and below are expected to get smaller increases. The national living wage increment came as a surprise to most employers. Here’s a summary of how the increase is expected to affect small businesses.
Burden for small businesses
The new national living wage rate is bound to increase the cost of doing business for small businesses. The new rate is expected to force small businesses to reduce their workforce and focus more on productivity. In a nutshell, the new rate is expected to reduce the number of jobs available in the small businesses sector. According to recent surveys done by recruitment firm Manpower, employers have plans to scale back their recruitment plans.
Businesses which have responded on the issue i.e. Costa Coffee plan on transferring the burden to the consumer. This simply means that the cost of goods and services produced by small businesses in the UK will increase. Some businesses have also indicated their preference for younger workers going forward in an effort to bypass the new legislation.
Employers are also expected to make contractual changes to deal with the uncertainties introduced by the new legislation. The contractual changes are expected to help employers gain back some of the control i.e. on what they pay their workers. For instance, some employers are already making contractual changes on bonus payments among other employee benefits. The impact of such contractual changes is expected to increase the number of disgruntled employees introducing other problems i.e. low productivity. Employers should also brace for legal battles as employees contest such contractual changes.
Employee relation issues are also expected to increase as employers take counteractive measures i.e. increase supervision to boost productivity. In a nutshell, small businesses are expected to take up a huge burden as they try to boost productivity as opposed to taking unfavourable measures such as raising prices. In some cases, small businesses will be forced to raise prices which may increase competition and in turn, reduce profits.
The new rate is also expected to introduce confusion with other wage rates such as; the Living Wage Foundation rate. Small business owners need clear explanations for the new rate to retain integrity.
Although any increase in national wages tends to do more harm than good for small businesses, the benefits of compliance may neutralise the negative effects. If employers who pay the official rate get accreditation among other notable benefits that allow them to boost profitability, the new rate can have a neutral effect. The national living wage rise could also have a natural effect if the increase in cost is passed on to the shareholders of small businesses in the short term.
The new national living wage rate offers some benefits as well. Besides introducing an unnecessary burden to small businesses among other problems like terminology issues, the new rate stands to make accreditation more attractive for businesses that want to gain competitive advantage through differentiation.
Small businesses also stand to benefit from increased productivity. Employees are also less likely to look for other jobs given the increase. This will, in turn, lower recruitment costs. Small businesses are also expected to reap the full benefits of training/investing in their staff.
It’s also worth noting businesses stand to get help. According to George Osborne, businesses will get corporation tax cuts by 2-18% to counteract negative effects of the new rate on profits. Small firms also stand to enjoy exemptions like paying national insurance on staff employed full time.
The national living wage increase will affect small businesses positively and negatively. The extent of the positive or negative impact is, however, dependent on emerging details as well as how small businesses plan to react. Small business owners who plan early stand to avoid most (if not all) negative effects.