HR · 4 August 2017

Living wage challenge continues to put pressure on small businesses

Pay slip close up macro shot
The projected target for NLW is £8.75 an hour by 2020

The majority of small UK businesses are taking lower profits in order to meet their National Living Wage (NLW) obligations, new research from the Federation of Small Businesses (FSB) has shown.

As many as 65 per cent of small company owners polled in a recent FSB survey said they’d taken lower profits because of the impact of NLW, which rose to £7.50 per hour for UK workers aged 25 and over on 1 April 2017.

Some 39 per cent of owners have put up the prices of their goods and services to cope with the latest increase, and a further 24 per cent have either cancelled or heavily reduced their investment plans.

Roughly a fifth of small businesses have been forced to reduce the number of hours staff work because they can’t pay them enough, and 19 per cent of firms have simply hired fewer workers.

The survey results come as overall operating costs for Britain’s small companies reach the highest they’ve been in four years. Key sectors facing the greatest squeeze include retail, care and hospitality – industries where wages are typically lower and profit margins are tighter.

Commenting on the statistics, FSB national chairman Mike Cherry said: “In sectors where margins are tight, small firms are resorting to more drastic measures to cope with the NLW.

“Small employers have demonstrated their resilience in meeting the challenge set by the National Living Wage, with many cutting their margins, or even paying themselves less, to pay their staff more.”

As a result of the findings, and in light of continued economic uncertainty, the FSB has encouraged the Low Pay Commission – the body that sets the NLW – to reconsider whether the projected NLW target of £8.75 an hour by 2020 is still viable, and wouldn’t put too much strain on employers.

Cherry added: “It’s vital that the NLW is set at a level that the economy can afford, without job losses or harming job creation. Cost pressures on small businesses are building, and with most recent economic indicators underperforming, we are now facing the reality that the NLW target may need to be delayed beyond 2020.

“To prevent the growing costs of employment from stunting job creation, the Government should use its Autumn Budget to uprate the Employment Allowance and focus it on the smallest employers.”

The living wage could actually benefit micro firms – but only if owners make the most of it

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ABOUT THE EXPERT

Fred Heritage is deputy editor at Business Advice. He has a BA in politics and international relations from the University of Kent and an MA in international conflict from Kings College London. He previously worked as a reporter at Global Trade Review magazine.

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