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written by
Jack Stratten

What does the National Living Wage mean for small businesses?

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The so-called National Living Wage was introduced in July 2015 during George Osborne’s Budget. From April 2016 it will become compulsory for businesses to pay all staff over the age of 25 the new rate, which will initially be £7.20 per hour. But what does this new rate mean for the small business community?

The bad news

Wage bills will rise significantly for small businesses. It’s an obvious but vital point to make.

A CIPD survey has suggested that for more than half of the UK’s small businesses, the National Living Wage will have a genuine effect on their wage bill. Another survey found that 77% of small businesses think the National Living Wage will limit their ability to hire and grow. And an FSB survey claims that just 6% of firms think the policy will have a positive impact on their business.

So there’s a fair bit of doom and gloom surrounding the National Living Wage. Small businesses are concerned that it will limit their ability to recruit, or even force them to reduce the number of hours they offer their existing employees. Others are saying that their prices will have to increase to accommodate the changes – indeed, more than 50% have suggested this.

But are all of these fears completely justified?

The good news

It’s definitely not all bad news for small businesses.

The introduction of the National Living Wage was heavily influenced by the work of the Living Wage Foundation – and incidentally, they think the rate should be much higher. Their campaign suggests that a living wage should always be based on the cost of living, not what the market can afford. And they have compiled a huge amount of research that shows the positive effect of a higher minimum wage.

Their wide-ranging evidence suggests that the living wage can improve productivity and quality of work, while reducing absenteeism and staff attrition. They also suggest that the costs of a higher minimum wage are normally cancelled out by reduced recruitment costs – in effect, it’s easier to recruit people when you’re offering a more liveable salary.

Many businesses echo this positive mood. 3 in 10 say they will recover the costs through productivity increases, and it’s important to remember that as many as half of the UK’s SMEs already pay at or above the new rate. So the impact won’t be as apocalyptic as some predict.

Small businesses can cope, and prosper

It’s easy to get caught up by fear – especially when the BBC throws out figures like £1billion in terms of costs to UK businesses.

But the reality for the average small business is far less scary. Apprenticeships are immune to the new wage policies, so small businesses can continue to grow by helping young people to learn at work. And because the new rate is not payable to under-25s, this actually marks a good opportunity to take a positive stance on youth unemployment.

Perhaps the new rate will mean that small businesses have to be more cautious in their early stages of development – their recruitment decisions will have to be carefully considered. But for SMEs, extra caution is healthy.

And ultimately, if your employees are earning more money, they’ll be happier, less likely to leave, and more productive. 

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