How Minimum Wage Increases are Leading to Financial Pressure on UK Businesses

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How Minimum Wage Increases are Leading to Financial Pressure on UK Businesses

Published: 1st September 2015

An increase in the National Minimum Wage (NMW) is to be introduced in October 2015. This will see wages rise by 3% and, according to government figures, should benefit more than 1.4 million of the UK’s lowest-paid workers.

The hourly rate increases over all age groups are:

  • £6.50 to £6.70 per hour for those aged 21 and over
  • £5.13 to £5.30 for 18 to 20 year olds
  • £3.79 to £3.87 for 16 to 17 year olds

The government has decided to increase apprentice wages by 57p per hour instead of the 7p per hour suggested by the Low Pay Commission, with hourly apprenticeship rates rising from £2.73 to £3.30.

Introduction of a National Living Wage (NLW)

In addition to increasing the National Minimum Wage, the government is to introduce a National Living Wage for those aged 25 and over. This will come into effect from April 2016 at a rate of £7.20 per hour.

Those aged between 21 and 24 will continue to receive the NMW from April 2016, when the additional statutory wage rate is introduced.

The effect of these increases on small and medium sized businesses is likely to be significant – some have gone as far as to say potentially catastrophic. Those in the care industry in particular may bear the greatest financial burden due to their reliance on workers earning minimum wage, with a huge decline in profits being anticipated.

A stark warning from the care home industry

Five large care home organisations have already warned of a potential collapse in their industry. A sharp decline in the number of care homes remaining open is expected, as a direct result of the increased wage bill.  

In an open letter to the Chancellor, they say that wages already account for around 60% of operational costs which resulted in tight profit margins even before the increase. Calling for extra funding of around £1 billion per year to meet new wage bills, the care home bosses predict that these new levels of pay are unaffordable for many.

Council run care homes are also expected to suffer. Although local councils outsource social care to external providers, the average payment from councils is anticipated to rise from around £13.66 to £16.70 per hour.¹

Will other industries be hit?

Those industries employing a high volume of minimum wage workers will struggle to cope with the additional financial burden.

Cleaning, retail and hospitality are all likely to be significantly affected, and may leave business in these industries with only two options - to increase prices or close down. The knock-on effect of price increases on trade, however, could be the start of a downward trend which would ultimately affect the British economy as a whole.

As far as larger businesses are concerned, it has been suggested that the main UK supermarkets will employ greater numbers of young workers to minimise wage costs, in addition to placing more services online.

An impact over the long-term

A report by credit rating agency, Moody’s, has suggested a significant long-term impact on the larger supermarkets, with a prediction that Morrisons could suffer a 10% drop in profits by 2017 if no action is taken.³

As more services become available online, store closures are a real possibility, but this would defeat the object of a boost in wages. Moody’s figures show that Asda, Tesco, Morrisons and Sainsbury’s employ 750,000 members of staff between them.

Their recent policy of differentiating themselves from lower-priced supermarkets by having a greater shop-floor presence, may need to change. They would be able to cut staff numbers by installing more self-service machines and using online technology.

Industry opinion

Speaking on behalf of the Confederation of British Industry, John Cridland commented on the national minimum wage increases,

“The CBI supports a higher skilled, higher wage economy, but legislating for a living wage does not reflect businesses’ ability to pay. This is taking a big gamble that the labour market can absorb year-on-year increases of an average of 6%.”

By 2020, the minimum wage for employees aged 25 and over will be £9 per hour, reflecting the 6% increase.²

The Chancellor’s plans to boost earnings for the lowest-paid are intended to save billions of pounds in tax credits, previously paid to those whose earnings were too low to sustain a decent quality of life.

Real Business Rescue has over 40 local offices around the UK, and provides a same day consultation free of charge. We offer professional advice on reducing the impact of the National Minimum Wage, and how to mitigate the potential threat to your profit levels.

When the company’s existing invoice finance provider called in the facility, we had only a short time in which to secure alternative funding for the business. Within the six week period available we were able to identify an appropriate finance provider and complete the application process ensuring a smooth transition between the new and existing lenders.
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