We’re all accustomed to the budget announcements each year adding a small incremental cost to our pay rolls and would normally allow for this in our annual budgets and forecasts. The 2015 budget is no different to any other, with a 2% – 3% rise in the national minimum wage being applicable from October.
This year however, the big surprise in Mr. Osborne’s budget is the introduction of a new National Living Wage (NLW) to targeted to be £9 per hour for the over 25’s by 2020. Whilst the concept of the Living Wage has been around for a while, it has never been compulsory, but as of April 2016 the first stage will increase the minimum wage by nearly 10% to £7.20 an hour.
Although the NLW will only apply to the over 25’s, they are accompanied by positive changes to help businesses pay for additional costs, such as lowering Corporation Tax to 18% by 2020, and reducing employer national insurance contributions.
These concessions for the employer, however, don’t offer much by way of encouragement for the unemployed over 25’s who will probably be overlooked for the low skilled and manual jobs in favour of the younger candidates costing the employer less for a few years.
Additional £5,000 per employee by 2020
The impact on businesses over the next 5 years could eventually accrue to an additional £4,875 basic cost per employee – and that’s not counting the employer on costs or recently introduced Pension Contributions, which could bring the additional cost per employee to over £5,000. For a small business with 10 or more employees, this equates to an additional salary bill of over £50k.
| Hourly Rate | Basic Annual | Increase over 2015 | |
| August 2015 | £6.50 | £12,675 | – |
| October 2015 | £6.70 | £13,065 | £390 |
| April 2016 | £7.20 | £14,040 | £1,365 |
| And by 2020 | £9.00 | £17,550 | £4,875 |
Hidden cost increases for supervisors & managers?
What may not be so obvious, however, is the impact this may have for many small and medium sized organisations with first level supervisors or middle managers. With small teams of employees it’s normal to pay a team leader, supervisor or junior manager a premium over the average hourly pay rate for the added responsibility their supervisory role requires.
If those supervisors are currently earning around £7.20 an hour, and your front line workers pay increases to that same pay rate in April 2016, the salaries of your supervisors or team leaders will need to be realigned according to your existing incremental pay scales. Otherwise your supervisors will be pretty upset when, come next Easter, they are earning the same as their subordinates. And if your first line supervisor salary increases, that may match their managers pay rates and so the costs add up? Escalated up through the ranks the final salary bill could significantly dent your profitability.
Is this the vicious circle of the cost of living?
These changes represent a significant percentage increase in costs for all businesses. Whilst the larger companies may afford to absorb the difference and take the hit on their profits to remain competitive, or even move their operations to offshore labour markets, the small and medium enterprises will undoubtedly have to adjust their pricing strategy to compensate, with costs being passed up the supply chain, and ultimately consumers paying the consequences. Will this, in turn, push up the cost of living – bringing us full circle back to the street value of the living wage?
How to mitigate the living wage increases.
If you can’t, or prefer not to pass on your increased costs, your business will have to take some swift measures. You will need to get the best value for money from the performance of your staff, improving working methods and simplifying processes. The subject of Productivity has surfaced over recent weeks as more analysts and economists start to see the ripple effect of these wage increases.
At Alluxi Consulting, we specialise in optimising your team’s performance. Implementing best practice management techniques, and productivity improvement measures across your business will make the difference between sink or swim for your business over the next few years.
