The National Living Wage (£7.20 per hour) is being introduced in April 2016, and is compulsory for all working people aged 25 and over.
This is an 11% increase from the current minimum wage rate of £6.70 per hour, the biggest rise to any government implemented wage since the National Minimum Wage was introduced in 1999. For all workers under the age of 25, the current National Minimum Wage will continue to apply.
These National Minimum Wage rates (as of 1st October 2015) are:
- £6.70 for workers 21 and over
- £5.30 18-20 yrs
- £3.87 for 16-17 yrs, who are above school leaving age but under 18
- £3.30 for apprentices under 19 or 19 or over who are in the first year of apprenticeship
The level of the minimum wage is currently recommended by the Low Pay Commission, who will now also recommend any future rises to the National Living Wage, with the government aiming to reach £9 an hour by 2020. Chancellor of the Exchequer George Osborne stated, “Britain deserves a pay rise and Britain is getting a pay rise.”
The new National Living Wage (NLW) is separate from the “Living Wage” which is an hourly rate of pay set independently by the Living Wage Foundation and is calculated according to the basic cost of living in the UK. The “Living Wage” is not compulsory, instead calculated by the Centre for Research in Social Policy at Loughborough University. In London, with the higher cost of living, the rate is calculated by the Greater London Authority. Its rate is now £9.40 within London, and £8.25 outside of London. More than £1,500 employers currently choose to pay the “Living Wage”.
The Office for Budget Responsibility (OBR) has estimated the cost to business due to the implementation of the compulsory National Living Wage will amount to 1% of profits. However, corporation tax is being cut to 19% in 2017 and 18% in 2020 which could go some way to offset the cost. Smaller firms are also due to benefit from a cut in their national insurance contributions.
However, Pricewaterhouse Cooper undertook a survey of employers, and found that many employers would be adversely affected financially by the implementation of the NLW. They showed that the retail, healthcare, hospitality and leisure, transport and logistics sectors would be worst hit by the introduction of the National Living Wage. Wage bills in retail are predicted to increase to £25.6m by 2020. The report also said that organisations with a large number of employees earning below the NLW will be the hardest hit and could see their wage bill rise by £2.3m next year.
Tim Thomas, head of employment policy at EEF, has said that although only a small number of employees will be directly impacted by the wage changes, there would be a ‘ripple effect’ throughout businesses. “For those members affected by the rates there will be restructuring, which will mean re-crafting and redesigning jobs, and potentially losing some jobs. That is for a small category of members.
“For a larger category of members, the impact will be a pressure to maintain pay differentials. Semi-skilled workers will want to see a pay differential in relation to the NLW. The knock-on effect is that skilled workers also want their differential maintained with semi-skilled workers. We are picking up indications of this ripple effect from members.”
Mark Beatson, chief economist at the Chartered Institute of Personnel and Development, said: “The national living wage was a bombshell for most employers when it was announced in July. It comes into force next April, which does not give employers a lot of time to prepare. Hence we found 26% of employers in September saying it was still too soon to say how they would manage the cost implications.
For those that have started to think about the consequences, the emphasis on efficiency rather than cost-cutting is welcome. However, our research also suggests that only a small proportion of firms see any substantial connection between the national living wage and other changes to taxes and national insurance contributions.”
Conor D’Arcy, policy analyst at the Resolution Foundation, said: “The national living wage represents a much-needed boost to the wages of millions of low paid workers. Because of their concentration among the low paid, women will account for the majority of the winners. This will have a positive – though modest – effect on the gender pay gap, and will particularly help those working part time.
“With typical wages still only at their 2004 level in real terms, and the employment rate at an historic high, the case for boosting the wages of these workers is strong. However, the pace of NLW increases over the parliament will move our labour market into uncharted territory.”
Justine Watkinson Partner and Head of Employment Law at Hillyer McKeown solicitors points out that many SME business have buried their heads in the sand regarding this fast approaching compulsory change to the law the impact of this change will potentially be very significant for businesses and the increased overhead costs may mean that rationalisation of head count is required to manage the increases, it is important that businesses assess the potential impact as early as possible to give them time to properly plan and reorganise to buffer the potential costs increases.