A little over a month ago, in the July 2015 Budget, one of the main talking points affecting UK businesses was the introduction of the new “National Living Wage”. Welcomed by many, some small business owners question what level of impact the new compulsory legislation will have on their organisations.
What is it?
Over the last few years we have become very familiar with the National Minimum Wage introduced in 1999 and currently set at, for those workers over 21 £6.50 per hour , £5.13 for those aged 18 to 20 and £3.79 for under 18’s (separate levels are set for Apprentices). As of April next year, the new National Living Wage will come into force and in effect is a premium on top of the existing National Minimum Wage for workers aged 25 and over. The new pay level will initially be set at £7.20 per hour, rising to around £9 per hour by 2020. In its simplest terms, it creates a 5th tier of National Minimum Wage.
This new National Living Wage is of course not to be confused with the “Living Wage” which many businesses have subscribed to voluntarily over the last decade through the Living Wage Foundation and currently pay a minimum of £9.15 per hour in London and £7.85 per hour outside of London. Whilst that is voluntary, the new legislation is compulsory for all employers in the UK.
Effect on small businesses
It is likely that smaller businesses with a high proportion of employees on minimum wage are the ones that will feel the financial and operational impact the most.
One of the biggest issues that employers need to face up to is looking in detail at their staff composition and ensuring that they are compliant with the new legislation. As well as taking into account age and contracted hours worked, employers need to ensure that other elements don’t take a worker under their statutory pay level, such as overtime and salary sacrifice. This must be reviewed for each pay period. Those businesses that currently pay their employees the voluntary “Living Wage” must not assume that they are compliant with the new legislation when it comes into effect.
The introduction of the National Living Wage is obviously good news for those employees who will see their pay increase and it is hoped there will be a positive impact on employee performance and reduced absenteeism as workers feel better financially rewarded for their efforts.
Although the change does not come into effect until April next year, it is important that businesses start thinking about the impact now and plan their budgets to take into account any potential wage bill increase. As with the existing National Minimum Wage, there is no doubt that the authorities will come down hard on anyone found to be non-compliant.