Minimum wage increase – How will it affect your business?
The national minimum wage has increased, with employers now required to pay all of their workers 21 years old and over a minimum of £6.70 per hour. This represents a 20p increase on the previous hourly rate of £6.50. Those between the age of 18 and 20 will now receive a minimum of £5.30 per hour compared to the previous rate of £5.13, and those under the age of 18 are required to receive at least £3.87 per hour, which is an 8p increase on the year before. Finally, apprentices have experienced the biggest national minimum wage increase, as they are now required to receive a minimum of £3.30, opposed to the prior £2.73 hourly rate. This is the biggest increase since 2007.
It is also worth pointing out that a new national living wage was introduced in April 2016, set at £7.20. This applies to anyone over the age of 25 years old. This is part of the government’s attempt to move to a society that offers a higher wage, lower welfare, and lower tax. It is predicted that this national living wage will rise to £9 by 2020. In addition to this, the Office of Budget Responsibility has estimated that this will lead to 60,000 people losing their jobs.
As an employer, if you do not pay someone the national minimum wage, you will find yourself facing severe consequences, as it is a criminal offence not to do so. You must also pay arrears to all of the affected employees imminently. The most obvious impact of raising the minimum wage is the impact it is going to have on your finances.
You are obviously going to be spending more money, and therefore you need to reassess your outgoings to determine how this is going to have an effect on your profit levels, and whether you will need to cut back in other areas of your business spending in order to accommodate the increased amount you are spending on employee wages. President of the Confederation of British Industry (CBI), Paul Drechsler, has remarked his surprise at the impact the proposed wage increases would have, stating it would wipe out the profits of companies.
Therefore, businesses need to look for ways to drive economies, with price increases being an obvious choice. The chief executive of Whitbread (which owns Costa Coffee), Andy Harrison, has already announced that the firm are likely to increase the price of their cappuccinos to afford the wage. A lot of other businesses will need to cut jobs to accommodate the wage increase.
Bad news for SMEs?
It is likely to be SMEs that suffer the most, as these businesses have a considerable number of staff that are on the minimum wage. However, these companies will get help, for instance, the new Employment Allowance will be increased by 50 per cent to £3,000. Industries that have less room to absorb the increase include farming, hospitality, and care homes.
However, it is not all doom and gloom, as this increase can have a positive impact on your business. You will notice a spike in productivity levels, as this increase in salary will give your workforce a boost in morale. Initially, this increase in productivity may be enough to counteract the increased expenditure, as your output will rise too.
Nevertheless, you will need to put a plan in place to ensure this productivity is maintained in the future and it may be time to speak to your accountants to discuss the potential problems and opportunities these increases will bring.
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About Alom Rouf
Alom is an Incorporated Financial Accountant and a Qualified Practising Member of the Institute of Financial Accountants. He has been in the accountancy industry since 2002. Throughout the years, he has gained a vast amount of experience in evaluating sole trader and partnership clients to assess whether they would be better off incorporating.