Calculating the cost of the National Living Wage
The biggest announcement in July’s budget was also the biggest surprise – the introduction of a new National Living Wage. As is usual, much of the budget had been trailed in the media beforehand, in particular proposed welfare cuts. However, on this occasion no consultation had taken place.
The new National Living Wage (NLW) will be introduced from April 2016 and, unlike the current benchmark Living Wage, it will be mandatory for over 25s. Set at £7.20 per hour it means that any employee above this threshold, currently paid at Minimum Wage rates, will receive an 11% pay increase in just 6 months, an increase that would probably satisfy even a Member of Parliament.
Although clearly a political move which was designed, in part, to steal those parts of Ed Miliband’s manifesto which the electorate had warmed to, this was also a clear shift in the Government’s thinking – to move the cost of increasing income for the lower-paid away from welfare payments and on to business via higher wages. The Conservative manifesto had already committed the party to a National Minimum Wage (NMW) of £8 by 2020; the newly aimed-for £9 NLW by 2020 rate is higher than even Labour had proposed.
For many industry sectors where pay at or near the Minimum Wage is commonplace the potential costs are significant and for many businesses will be the difference between profit and loss. Whilst there are some small tax reductions via an increased Employment Allowance (£1,000 more off an employer’s annual National Insurance bill from next year) and a reduction in Corporation Tax, (down to 19% and then 18% – however, it will be December 2018 at the earliest before this benefit is felt) these modest savings will be dwarfed by the potential costs.
Many will support the aims of the Chancellor to reduce the welfare bill by raising incomes and appreciate that this will be good for the economy as a whole. So maybe, as some say, businesses should indeed “stop whinging” and get on with it?
Of course it isn’t as simple as that. Increasing the pay of those at the bottom of the pay scale is one thing, but this will have a knock-on effect throughout the workforce as a whole. Employees earning above the new Living Wage rate will also seek pay increases in order to maintain their differentials from more junior employees.
A concern with the new Living Wage is that it will dampen the tentative recovery over the last couple of years. It will do nothing for those starting out in their careers who, being under 25, will not qualify for the new rate and may encourage some businesses to increase the casualisation of their employees through an increased use of zero hours contracts. The corresponding tax reductions will only outweigh increased costs for the largest businesses. Finally, it increases uncertainty and reduces job security which ultimately will surely hold back the economy as a whole in the longer term.
Although the Budget was a number of months ago, the Government has yet to release any draft legislation or guidance on exactly how the new Living Wage is to be calculated and whether anything other than wages or salaries will be allowable. In a number of sectors it is common for employees to receive more from their employer than just basic pay.
The one thing we can be certain of is that the National Living Wage is now here and here to stay. Like the Minimum Wage before it, once here no party would dare to be seen to abolish it.
So how much will the new National Living Wage cost me?
|Number of employees paid at NMW (£6.70) at 31.3.2016||Annual NLW increase in pay based on 48 hour week (inc. employer NICs less £1,000 increased Employment Allowance)||Level of profitability required for tax reductions to outweigh costs*|
* Corporation tax reduced by 1% for accounting periods beginning from 1.4.2017. No tax reduction for sole traders or partnerships
For more information contact Peter Davies