UK Living Wage

Finance and legal

23 March 2016

The UK Living Wage has been raised by 20p to £8.45 per hour (£9.75 in London). But, what is the living wage and how does it impact you and your business?

What is the Living Wage?

The concept of a Living Wage was introduced around ten years ago by the Living Wage Foundation. It aims to end in-work poverty and ensure employees can afford the basic necessities of life. Currently it’s provided on a voluntary basis at a rate of £7.85 an hour.

However, the UK Government will make a National Living Wage compulsory for all employers this year, and will be paid as a premium on top of the National Minimum Wage – currently set at £6.70 per hour. This means over-25s will receive £7.20 per hour from April 2016, with the rate set to increase to £9 an hour by 2020. Employers will have six months to apply the new wage system.

How will you be affected?

The government claims that the introduction of the Living Wage will not be an undue financial burden on employers thanks to other changes announced in the budget, such as lower rates of corporation tax. But research conducted by Yorkshire Bank indicates that almost 60% of the SMEs surveyed believe that the NLW will put pressure on their bottom line.

This concern is greatest amongst businesses with 50–100 employees, although research conducted by the Resolution Foundation suggests that micro-businesses will actually be the most affected. They're likely to incur a 1.5% increase to their wage bills compared to a 0.6% rise for much larger firms. Plans for the NLW to rise year on year could also be a problem for SMEs who may not be able to increase their productivity enough to keep up with the pay rises.

What should you do next?

The government advises that business prepare early for the changes, and follow these steps:

  • check which employees are eligible
  • update the company payroll
  • promptly communicate the changes to staff

To find out more about the steps you need to take, visit the government's Living Wage online hub.

But it's not all doom and gloom. On the plus side, SMEs can hope for certain benefits from the NLW, such as a more engaged team, reduced absenteeism and generally improved staff satisfaction. Could this higher hourly rate create small businesses opportunities?

Rising wage bills

When the National Living Wage was announced in 2015's July Budget, there was initial concern in the business community. The Resolution Foundation reported that businesses with ten employees or fewer would face an increase of 1.5% on their wage bill, while the Federation of Small Businesses (FSB) warned that the 70p pay-rise would be most damaging to the hospitality, retail and social care sectors.

Smaller profit margins

The FSB announced in September that small businesses are meeting the challenge of the national living wage, but six out of ten are absorbing the costs and so facing lower profits as a result. In October 2016, insolvency firm Begbies Traynor found that nearly 100,000 British businesses in industries particularly affected by minimum wage legislation, such as retail and hospitality, were experiencing economic distress. This is a 23% increase on April, when the National Living Wage was introduced.

Increased productivity and employee satisfaction

Studies have also shown that paying the voluntary living wage can have a positive impact on the reputation of small businesses, and on employee satisfaction levels. A recent survey of 250 SMEs carried out by Middlesex University London and Liverpool University found that paying the recommended higher living wage improved relationships between staff and management and had a positive impact on employee retention. In addition, 72% of respondents noticed a positive effect on their brand's reputation.

With clear benefits as well as costs, the voluntary Living Wage raises some important questions for small business owners. It will be up to your own business’ individual circumstances to decide whether the benefits outweigh the potential drawbacks.

The introduction of this Living Wage will be a big change for businesses and SMEs in particular, but what’s your view? Is this a positive move by the Government or are you concerned about how your SME will be affected?