National Living Wage increases: what small businesses need to know

Finance and legal

28 March 2018

It’s been two years since the government introduced the National Living Wage (NLW), and it’s set to increase again.

The new rate applies from 1 April 2018, so employers large and small will need to make sure their payroll is up to date. That means your business must be fully prepared for the extra cost, the bureaucracy and any wider impact it may have.

So what does the new National Living Wage mean for you?

What is the National Living Wage?

The National Living Wage was once a campaign to raise the level of the National Minimum Wage (NMW), but since it was brought into law in 2016 it has become the new base level that must be paid to everyone over the age of 25. The legal minimum for under-25s is still called the National Minimum Wage.

The new minimum pay levels for 2018 come into force from 1 April. The updated figures are as follows:

Apprentice*   £3.70/hour
Under 18  £4.20/hour
18 to 20 £5.90/hour
21 to 24 £7.38/hour
25+  £7.83/hour

*The apprentice rate applies only to apprentices under 19, apprentices over 19 are entitled to the relevant minimum wage for their age.

How will the changes affect my business?

The government worked out that the rise will equate to £600 per year added to the pay packet of every full-time employee over 25. However, while it’s handy to have a headline figure, it doesn’t tell the whole story.

These annual increases range from 3.7% for under-18s to 5.7% for over-25s. That’s significantly above the latest UK inflation rate, which stands at 2.7% according to the ONS. For employers that means your costs are likely to rise by more than your prices, so it might be a good time to revisit your cashflow statement to ensure you can cover them.

While budgeting for pay increases seems tough, the alternative is much worse. Failing to comply with NLW and NMW laws can result in a fine of up to £20,000 and a 15-year ban from running a company.

What should I do next?

Just like when the NLW was introduced, it pays to be prepared. That means:

  • Checking which rate applies to your team.
  • Updating the company payroll.
  • Informing your staff of their pay rise.

Consider using this as a chance to run a performance review, and to discuss pay and work conditions with your team. Find out if your employees are happy with the way they are working, and whether you can take any fresh opportunities to improve their skills and work rate.

Will the National Living Wage rise again?

When the NLW was introduced, the government’s long-term target was to push the NLW up to £9/hour by 2020, which would require even bigger increases in minimum pay levels over the next two years.

However, there’s no guarantee that this promise will be kept. In fact, analysts say that wage growth rates mean that £8.75 seems a more likely figure now. Nonetheless, it would be wise to plan your cash flow based on the assumption that it will reach the higher levels.

And however tight your budget, make sure you have sufficient safeguards in terms of emergency financing options and business insurance cover.