National Living Wage increases: what small businesses need to know

Finance and legal

1 March 2022

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

The new rate applies from 1 April 2022, 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 23. The legal minimum for under-23s is still called the National Minimum Wage.

The new minimum pay levels for 2022 come into force from 1 April. The updated figures from the Government website are as follows:

Apprentice*   £4.81/hour
Under 18  £4.81/hour
18 to 20 £6.83/hour
21 to 22 £9.18/hour
23+  £9.50/hour

* The apprentice rate applies only to apprentices under 19 or 19 and over in their first year of their apprenticeship. Apprentices over 19 who have completed their first year are entitled to the relevant minimum wage for their age.

How will the change affect my business?

The government worked out that the rise will equate to £1000 per year added to the pay packet of every full-time employee over 23. However, while it’s handy to have a headline figure, it doesn’t tell the whole story.

These increases range from 4.1% for ages 20 and under, to 9.8% for 21 – 22 year olds, 6.6% for ages 23 and over, and an 11.9% rise for apprentices. Given that the UK inflation rate is anticipated to be about 7% this year, that means some age groups will see their pay rising by more than the inflation rate. For employers that means, depending on the average age of your staff, your costs could 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, one of the government’s long-term target was to push the NLW up to £9/hour by 2020. Having achieved that, there are other goals that they’re now focusing on. For example, they want to move 21 and 22 year olds onto the National Living Wage by 2024 which is why there’s such a large percent increase in their wages this year.

The Living Wage Movement feels that the government plans aren’t ambitious enough and that wages should be even higher to meet the current living costs but there’s no indication that the Low Pay Commission would increase wages at the rate that this movement advocates for.

That doesn’t mean increases to the National Living Wage are done though. Given the end goal of two-thirds of median earning in 2024, wages will need to rise again in the future. As such, 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.

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