The Impacts of the New National Minimum Wage on Small Businesses

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At the beginning of April, the National Living Wage (NLW) in the UK rose for employees aged 21 and over. While higher wages are a positive for workers, this 6.7% increase poses major challenges that small businesses and retailers cannot afford to ignore.

Recent surveys paint a concerning picture - over 25% of retailers may be forced to reduce hiring due to the increased labour costs. Meanwhile, around a third may need to raise their prices to accommodate the new rate. For small and medium companies (SMEs) already operating with tight budgets and margins, absorbing such a substantial hike in staffing overheads risks squeezing cash flows and stifling growth prospects.

In this blog, we'll break down the details of the new rate and explore the impacts on the UK's small business community. From compliance obligations to practical strategies for offsetting costs, we've got you covered. 

Key takeaways

  • The new £11.44 National Living Wage for workers aged 21+ represents a significant 6.7% increase that will strain small business budgets and profitability.
  • To offset higher labour costs, SMEs must take proactive measures like forecasting impacts, implementing cost controls, boosting productivity, and exploring automation.
  • Ensuring full compliance with the updated minimum wage regulations is legally required and critical for avoiding penalties like fines.

What is the new national minimum wage?

The biggest change is that the higher "National Living Wage" rate will now apply to all workers aged 21 and over, instead of just those aged 23 and up. This National Living Wage is being raised to £11.44 per hour, a significant 9.8% increase from the previous £10.42 rate.

Minimum wage rates for younger employees are also going up substantially:

  • Workers aged 21-22 will now receive the £11.44 National Living Wage (12.4% increase)
  • Workers aged 18-20 will get £8.60 per hour (14.8% increase)
  • Workers aged 16-17 will get £6.40 per hour (21.2% increase)
  • The apprentice rate is increasing by 21.2% to £6.40 per hour

These adjustments, which exceed the general rate of inflation, are already in effect, and it's important to note that all employers, regardless of size or industry, are expected to comply with these new minimum wage rates. The 2024 changes, recommended by the Low Pay Commission, represent one of the most substantial uplifts in recent history.

Proactive strategies for small businesses

While the increases will benefit many workers, the reality is that the higher labour costs pose big challenges for small businesses. With narrower profit margins and limited resources, it's crucial to get ahead of the changes with careful planning and strategic action.

Budget planning and forecasting

It's crucial to crunch the numbers and forecast how much more your total staffing costs will increase under the new £11.44 National Living Wage. Update your budgets and financial projections accordingly. This allows you to plan ahead for the cash flow impacts.

Identify cost savings 

Conduct a line-by-line review of your business expenses and operations to find potential cost savings that can help offset the higher labour costs. Even small reductions in areas like utilities, supplies, subscriptions etc. can make a difference.

Optimise productivity 

Look for ways to increase productivity and efficiency so you can achieve the same output with fewer labour hours required. This could include improving processes, utilising technology better, or reorganising staff responsibilities.

Streamline operations 

You may need to streamline certain aspects of your operations or product/service offerings that are costly or inefficient. Identify and remove bottlenecks, modernise outdated practices, and discontinue underperforming lines.

Explore automation

Investing in automation technologies can help reduce reliance on lower-skilled labour over time. Automating tasks like inventory tracking, scheduling, customer service etc. allows you to redirect resources to higher value roles.

Compliance and legal considerations

Paying staff the new £11.44 NLW rate for those aged 21 and over, as well as the updated NMW rates for younger employees, is a legal requirement. There is no way around complying with these wages set by the government.

The penalties for underpaying staff can be serious:

  • You may be forced to repay workers up to 6 years' worth of underpaid wages
  • Financial penalties of up to £20,000 per underpaid employee
  • Risk of prosecution and additional fines
  • Being publicly named by the government as a non-compliant employer

It is also automatically considered an unfair dismissal to fire someone aged 21+ to avoid paying them the £11.44 NLW.

To ensure full compliance, make sure you take the following actions:

  • Review and update employment contracts to reflect the new NMW/NLW rates
  • Adjust payroll systems and processes for the new wage minimums
  • Update HR policies and procedures related to compensation
  • Properly communicate pay changes to employees

Wage regulations can change annually, so it's critical to stay up-to-date on the latest NMW/NLW rates set by the government each year. Assign someone to monitor announcements and make necessary policy/system updates.

Resources and additional support

Here are some helpful resources and sources of additional support:

Government resources

Industry associations

Legal advisory

The bottom line

The new higher National Minimum Wage and National Living Wage rates pose financial challenges for small businesses. However, proactive planning, cost controls, and operational improvements can help SMEs successfully navigate this transition.

Ensuring full compliance is critical to avoid penalties. By utilising available support resources and implementing the right strategies, small firms can offset the wage hike impacts while sustaining growth and retaining staff.

This does not constitute financial advice. Please consult an accountant or financial advisor if you would like more information. 

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