From 1 April 2022 the UK government will introduce a rise in national living wage and minimum wage.
While workers will be looking forward to their wage increase, many small businesses will not. Being prepared for the increase in national living wage and minimum wage is vital for every small business to minimise its impact.
What Will Change?
The hourly rate for worker who are 23 years old or over will change from £8.91 to £9.50, which is an increase of 6.6%. With this rise in national living wage they are following the recommendations of the Low Pay Commission.
They also followed the Low Pay Commission’s recommendations regarding the national minimum wage, which applies to workers under the age of 23. Here is what will change from 1 April 2022:
- 21 – 22 year olds: minimum wage rises from £8.36 to £9.18, an increase of 9.8%
- 18 – 20 year olds: minimum wage rises from £6.56 to £6.83, an increase of 4.1%
- 16 – 17 year olds: minimum wage rises from £4.62 to £4.81, an increase of 4.1%
- Apprentices: minimum wage rises from £4.30 to £4.81, an increase of 11.9%
These rises will mean that a full-time employee will receive a pay rise of over £1,000 per year.
Employers are bound by law to implement this rise in national living wage and minimum wage. This means you cannot pay any worker below these rate, even if they were to agree to a lower wage.
The penalty for non compliance has also been raised from 50% of an employee’s annual wage to up to 100%. And on top of the penalty, your business might also be prosecuted and get hit with an additional fine.
However, paying your staff the minimum national living wage or national minimum wage will also increase the satisfaction of your employees, which will increase their productivity and performance. And this is important for staff retention.
What Impact Will This Rise In National Living Wage Have For Small Businesses?
While this rise in national living wage and minimum wage is great news for employees, it will increase the financial pressure on businesses.
Because a pay rise also means a rise in other costs, such as national insurance and employer pension contributions.
And given that from 1 April 2022 the national insurance tax will also rise by 1.25%, employers have to expect to pay over £200 more national insurance per employee. For small businesses it could be difficult to absorb these costs.
Already, 80% of small businesses have said that they do not expect to hire new staff in 2022. And even if a small business wants to hire new staff, they will have to compete with bigger companies, who will be able to absorb these costs more easily.
And bigger businesses will also be able to offer higher hourly rates than just the minimum national living or minimum wage, which will allow them to outcompete smaller businesses.
This could mean that it will not only be more difficult to find new staff, but also to retain already existing staff, if they can get a better pay package elsewhere.
Combined with other financial pressures such as tax rises, rising fuel and energy costs, rising inflation and the fallout from a pandemic, which is still going on, the impact on small businesses of the rise in national living wage and minimum wage is very big.
The British Chamber of Commerce has warned the Government that especially small businesses will find these additional costs difficult to absorb.
With rising energy costs, higher raw material prices, high levels of debt as a result of the pandemic and tax increases due, many firms are facing a cashflow squeeze. So while businesses support the minimum wage, the size of this increase will cause significant concern, especially with so many smaller firms already struggling.Jane Gratton, Head of People Policy at the British Chamber of Commerce
How To Prepare Your Business For The Change
To weather the storm, small businesses have to be prepared for this rise in national living wage and minimum wage and minimise the impact on their business.
No business owner wants to let go staff, so here are some tips how you can prepare your business without making employees redundant.
- Cutting costs – switching suppliers, offering flexible working to reduce office space, delay buying new equipment or buy second hand, etc.
- Reduce benefits – if you offer free refreshments to staff, such as tea and coffee, pause this to save money
- Don’t replace staff that leave naturally – for example by retiring
- Reduce hours – talk to staff to see if they would be willing to work less hours – this is only possible if the employee agrees
- Voluntary redundancy – this is probably a last resort for most businesses, but it could help reduce the costs
The year ahead will be difficult for many small businesses, but being prepared for the rise in national living wage and minimum wage will give your business the best change to weather the storm.