Will the National Living Wage affect small businesses?

Posted April 5, 2016

As the new tax year dawns, small businesses must start paying the new National Living Wage (NLW) to employees aged 25 and over. In its inaugural year, the NLW is £7.20 an hour, rising to £9 by 2020. That means employers must budget for a 45p an hour increase every year for the next four years.

Many small businesses already pay their employees over and above this level, but it does vary by industry. If you are in the position of needing to find extra money to pay your employees the NLW, what should you do?

Paying the National Living Wage: A checklist

There are significant fines for employers who do not pay the NLW, and the list of offending companies will be made public. Therefore, the first thing you need to do is make sure everyone in your company who qualifies for the NLW is in fact receiving it.

Step 1: First, check your employees’ birthdays and employment status. The new rate is payable from April 1^st, so make sure any employees aged 25 or over are paid at least £7.20 an hour. This includes any casual workers unless they are providing services to you as a freelancer or contractor.

The only exception to this rule is first year apprentices aged 25, who do not need to be paid the NLW until they begin their second year.

Step 2: Update your payroll system to process the new rate. If you are using a modern accounting platform to manage your payroll, this will be easy. Otherwise, you will need to work with your payroll provider to organise this.

Step 3: Tell your employees about their new rate of pay.

Managing the cost

If you are worried about the NLW putting additional pressure on your profit margin, there are several options open to you. Some may cause more problems than they solve, such as:

Freeze bonuses – this will act as a disincentive to your employees.
Reduce hours – employees will likely look for work elsewhere.
Employ younger workers – eventually they will turn 25, and in the meantime their inexperience may cost more than it saves.
Pass the cost on to the customer – unless you can justify a price increase, customers will likely go elsewhere.

A far better solution is to modernise your business systems so you can operate more efficiently. Here are just some of the many time and money saving actions you could take:

Use freelancers – no holiday pay, no PAYE/NICs, no sick pay, and no paying for wasted time.
Streamline your processes – look at how efficiently people are performing their roles. Are there repetitive tasks that can be automated? Are there systems that can be put in place to prevent costly and time-consuming human errors?
Move to online accounting – many small businesses who use Xero find them so easy to use that they don’t need a bookkeeper at all, and they require only a basic service from their accountant.
Run a costs audit – are you leaking profit in unnecessary areas? Whether it’s cancelling subscriptions you don’t really need, or negotiating a better advertising deal, there are often savings that can be found to offset the effect of the NLW. Xero are really useful for this exercise as you can see at a glance exactly where your business’s money is going and where you could cut back.

You can read more about the National Living Wage on the Government’s dedicated website.