Employers Concerned Over Raising Wage Costs

As announced by the UK Government in the Autumn Budget 2024, the National Living Wage (NLW) and National Minimum Wage (NMW) will increase from April 2025.

The National Living Wage (workers aged 21+) is set to increase by 6.7%, from ￡11.44 to ￡12.21.

The National Minimum Wage (18-20 year olds) will increase by 16.3%, from ￡8.60 to ￡10.00.

The National Minimum Wage for 16-17 year olds and apprentices will increase by 18%, from ￡6.40 to ￡7.55.

Chancellor Rachel Reeves said: “This government promised a genuine living wage for working people. This pay boost for millions of workers is a significant step towards delivering on that promise.”

While many Employees and businesses are in support of an increase that reflects the rise in the cost of living, there is apprehension over the extra costs involved, especially since the announcement that National Insurance Contributions (NICs) will be increasing by 1.2%, and the threshold decreasing from ￡9100 to ￡5000 from April 2025.

Concerns have been raised, particularly amongst small and medium-sized enterprises (SMEs), on the basis of the new increases, after two prior years of substantial increases, the additional increase in the NICs, and changes to Regulations by way of the Employment Rights Bill, all set against a backdrop of tough, competitive markets and general cost pressures associated with operating a business.

Impact on Businesses

As a simple illustration, the planned 6.7% rise means that a full-time National Living Wage worker (aged 21+) would be paid just over an extra ￡1,500 per year.

The increase in the NMW and NLW and associated costs will impact many businesses' bottom lines and profitability, particularly SMEs, with many operating in challenging or competitive markets where margins are already tight.?

The rises are likely to affect operating costs, hiring practices, and overall business strategies.

Of course, Employers want their Employees to receive the pay they deserve, but the cost pressures may mean that some have to offer their Employees fewer hours, avoid or delay hiring for vacancies, or increase their prices to their customers.?

Currys, the major UK electricals retailer, is amongst 80+ retailers voicing concerns about the impact of the Budget measures on business, warning that they may need to raise their product prices, and stating that they will be reducing hiring due to the rising wage costs which will also increase their operating expenses.

For SMEs, the cost increases could be crippling.

?A Knock-On Effect?

Many commentators have expressed concern about the ‘knock-on effect’ that could also be experienced by Employees already earning above the minimum wage, as well as younger workers and apprentices.

Once the change comes into effect, Employers are legally bound to raise pay for Employees earning below the NLW and NMW. However, a secondary consideration is that Employees already earning above those rates may expect to see an equivalent pay raise too, in order to maintain the gap between the National Living/Minimum Wage and their pay.

While the planned increases aim to close the gap between the National Minimum Wage and the National Living Wage, in the move towards a single adult rate, there is concern that small businesses struggling with the increased costs may be forced to do whatever they can to keep paying their existing Employees, and a likely action will be that they stop hiring. This could potentially remove opportunities for young workers and apprentices trying to enter the workforce for the first time.

Overall, there is great concern that the increased financial obligations could lead to hiring freezes, job losses, and even businesses going under.

What Businesses Are Doing, And What They Can Do

The Business Insights and Conditions Survey, carried out between 16th and 29th September 2024, asked several businesses how they plan to adapt to the future increases in the NMW, NLW and Employment costs. It found that 23.9% plan to increase their prices to customers, 17.6% plan to absorb the costs into their profit margins, and 6.8% plan to reduce the number of Employees.

In an effort to reduce the financial burden, some businesses are considering investment in a combination of technology and part-time workers. Particularly in the retail and hospitality sectors, there is a focus on using online platforms and ecommerce to generate internet sales or manage customer communications. This would lead to less need for workers on the shop floor, but may require more highly skilled workers to create and manage the e-commerce systems. However, this is an option that is more accessible to larger companies than most SMEs.

Some Employers may opt to be more selective in their hiring practices, targeting only highly skilled workers.?

While money is often a dominating factor in why many people choose the jobs they do, it isn’t necessarily what motivates them to stay or what keeps them engaged. A work/life balance, and a sense of purpose and belonging are often touted as the most popular drivers of motivation. On that basis, if an Employer wishes to remain competitive (beyond raising the pay of their Employees earning less than the NLW or NMW when it increases), they can offer non-monetary benefits such as flexible working, remote working options, training schemes and wellbeing initiatives to keep Employees engaged and attract new talent.

Another option for Employers is to invest in apprenticeship schemes. Apprentices are paid a lower minimum wage, which could be a good option for Employers wishing to build a skilled workforce while keeping their costs manageable. It would also restore some employment opportunities for young people that many fear may be lost in the ‘knock-on effect’ we discussed earlier. Employers have the option of transitioning their apprenticeships to full-time roles later.

Many SMEs will likely find that the easiest option is to pass on the cost increases to their customers. This does have the potential to negatively affect them competitively, though, so before taking this step, it will be worthwhile to them to find out if they can re-assess or make adjustments to their supplier contracts, and minimise their overheads.

With the change just a few weeks away, Employers with concerns can take this time to examine their businesses for any cost savings that can be made, or any inefficiencies or loss-making activities that could be eliminated. This could involve restructuring teams, re-assessing job roles or outsourcing operational tasks such as payroll and marketing. There does remain the chance that these measures could result in some Employees being offered reduced hours, or even redundancies being made. In terms of hiring, Employers may choose to hire part-time Employees or contractors in a bid to reduce costs.

Conclusion

Employees and Employers are in agreement that everyone needs to receive a liveable wage.? However, the substantial rise in the NLW and NMW over a relatively short period, compounded by tax increases, may prove financially burdensome for some SMEs, particularly those who may already be struggling with competitive markets.

There is also the danger that Employees on the current NMW and NLW will become unaffordable after the pay increases, forcing hiring freezes, redundancies, or worse, business closures. It is unlikely that every SME will come through this change unscathed.