Since April 1st, employers throughout the UK now have to comply with the new National Living Wage (NLW) legislation. In some parts of the country, up to one third of employees will get a pay rise, as workers over 25 that don’t currently receive NLW could receive almost £1,000 extra per year.
While this is great news for Britain’s workforce, the pressure this could put on small businesses is a cause for concern. Research from the Federation of Small Businesses (FSB) reveals that 38 percent of small employers expect the NLW to negatively impact their business, whilst just 6 per cent think it will have a positive outcome.
Along with pension auto-enrolment and the apprenticeship levy, the increased wage bill could add another burden to the UK’s already cash-strapped small businesses. Nationally, SMEs could be facing additional costs of £1.67bn according to research by Moorepay.
Many small businesses are expected to hold off on recruitment, raise prices or postpone planned investments to offset their higher wage costs. But these measures may be creating unnecessary barriers to growth.
By taking the following steps, small business owners may be able to mitigate some of the more negative effects of the NLW:
1. Gauge the impact on your particular business
While all small businesses will have to comply with the NLW, firms operating in particular industries and locations, and of certain sizes, will bear more of the brunt of this new legislation.
The hospitality and retail industries, where there are high concentrations of low-paid jobs, will be hit harder than most. The resolution foundation has estimated that the changes will add 3.4% to total wage bills in hotels and restaurants, and 2% to total wage bills in retail by 2020.
Similarly, companies based in rural locations face disproportionately higher costs. Sectors like farming could be dealt a double blow, as many of the smaller firms in this industry are also family run. Therefore, they will miss out on savings from the Government’s reduction in corporation tax while still having to field higher wage costs.
Micro firms (those with fewer than nine employees) are also likely to be disproportionately affected. According to BIS 16.2 per cent of employees in micro firms will be covered by the NLW, compared to 9.7 per cent in slightly larger firms.
On a positive note, analysts have predicted that the retail and leisure sectors will see an £8bn boost due to low-paid workers spending more. With this in mind, some of the small firms most affected by the wage increase could also be the ones set to gain from a boost in consumer spending.
2. Forecast for additional costs
With higher employment costs on the horizon, it’s now more important than ever for small firms to prepare forecasts.
Good quality forecasts can provide clues to future income and expenditure, allowing firms to invest with confidence and make the bold decisions businesses need to grow. According to our own research, UK small firms that prepared forecasts in 2015 grew by a third more than those that didn’t.
These insights can also be used to budget for additional costs in a way that does not hinder overall growth.
3. Focus on productivity
As all business owners know there are two ways to balance the books – save on expenses, or raise extra income.
Many businesses are in a very difficult market position when it comes to passing extra costs on to customers in competitive markets, so when wage bills have to rise it’s all about finding ways to increase productivity. In which case the answer has to lie in innovation. Whether innovating more efficient solutions, or new valuable products and services.
As with most new legislation, the NLW will disproportionately affect some businesses more than others. My key piece of advice is to be prepared. Keep up to date with the implications for your company, undertake careful financial planning and ward off rash decisions.
Request a quote to see where our accountants can help with the National Living Wage and any implications for the financial management of your business.
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