National living wage: A guide for business owners

National living wage: A guide for business owners

9 March 2016

New National Minimum Wage regulations will take effect on April 1st and all employers will be required to meet them.

The National Living Wage will apply to employees aged 25 and over and it will essentially mean that employers will have to pay their staff an extra 50 pence per hour, with the rate set at £7.20.

The requirement could put many small and medium sized business owners in a difficult position, particularly if they operate in the margin-conscious retail sector or employ a lot of minimum wage employees.

National Minimum Wage rates:

  • Employees aged 25 and over - £7.20 per hour (National Living Wage)
  • Employees aged 21-24 - £6.70 per hour
  • Employees aged 18-20 - £5.30 per hour
  • Employees aged 16-17 - £3.87 per hour
  • Apprentices* - £3.30 per hour

*The rate for apprentices applies to 16-18 year olds and those aged 19 or over who are in the first year of their apprenticeship. All other apprentices are entitled to the National Minimum Wage for their age group.

Voluntary Living Wage

It is important to stress that the government mandated ‘Living Wage’ (£7.20 per hour) is not the same as the voluntary Living Wage suggested by the Living Wage Foundation. The voluntary Living Wage is set at a higher rate (£9.40 in London and £8.25 in the rest of the UK) and is calculated according to the basic cost of living in Britain.

Paying this rate can have advantages for businesses.  The Living Wage Foundation claims that 80% of the businesses they surveyed (in London) found that the quality of their employee’s work improved after they committed to the higher rate of pay. For many businesses, particularly smaller firms, paying the higher rate may be difficult.  

What if a business can’t afford the hourly increase?

If you think that you will struggle to afford the increase in minimum wage then you have a number of options.

  • Consider reducing hours – reducing hours could help soften the impact of increase. Usually, this will require a change of contract which means that you need to get the agreement of your employee. This can be delicate and you should take care to explain the situation to employees, including any criteria you may use to decide whose hours get reduced.
  • Make efficiencies with technology – technology has advanced in ways that reduce the need for human input. Robot car manufacturers and self-checkout machines are two examples of this. But other technologies, like admin software and cloud-based accountancy products can reduce the need for employee involvement.
  • Take on more apprentices and younger staff – the minimum wage rates for younger staff members and apprentices have not significantly changed. Businesses may be tempted to employ more of these employees as a way of reducing staff costs.
  • Consider layoffs – your last resort should be to consider reducing the number of employees. Again, this can be a delicate matter and in certain circumstances can end up costing more than swallowing the wage increase. We recommend that you seek professional advice before pursuing this strategy.

For more information on how the National Living Wage will affect your business, speak to a member of the Umbrella.co.uk team.  01625 546 610   team@umbrella.co.uk