News and Events

National Living Wage...Have you budgeted?

View profile for Amy Edwards
  • Posted
  • Author

As of 1st April 2016, the Government’s new National Living Wage (NLW) will become law. The NLW supports the Government’s vision of a higher wage, lower welfare and lower tax society and is in effect a political spin (albeit a significant jump) on the annual increase to the standard National Minimum Wage rate (NMW) for those who qualify, applying a ‘premium’ to the basic NMW rate. 

Generally, all workers in the UK who are covered by the NMW and aged 25 or over, will be legally entitled to a minimum of £7.20 per hour (current standard rate NMW is £6.70).

Since October 2013, in excess of 400 employers have been named and shamed for not paying the National Minimum Wage. In an effort to prevent this from re-occurring, the Government has increased the fine from a maximum of £20,000 per employer to a massive £20,000 (up to) per employee affected. This makes a huge difference!

What’s the difference between the current ‘Living Wage’ and the new NLW?

Although they sound very similar, they are in fact entirely different. 

The existing concept of the ‘Living Wage’ is simply a non-mandatory reference point for employers, established by pay lobbying groups, and representing a recommended and encouraged minimum pay figure based on the cost of living across the UK. There is no statutory basis for it and there is no requirement for employers to comply. 

In comparison, the NLW will be implemented by way of a premium applied to the National Minimum Wage (for qualifying persons) and therefore will have the full support of the legislature. Of course, the government is ‘spinning’ like fury, with nationwide TV advertising and the like and things are likely to be enforced robustly. It is intended that the NLW will rise each year until it reaches £9.00 per hour in 2020. It is also anticipated that this proposed increase is likely to affect around 2.5 million workers across the UK.

Who is eligible?

The hourly rate of £7.20 under the NLW is only applicable to workers who are aged 25 or above.

Who is not eligible?

Although many are likely to benefit from the NLW, the following groups of workers will be unaffected by the changes and will therefore not benefit from the increases to pay:

•    Self-employed
•    Volunteers
•    Students on work experience
•    People on particular training scheme
•    Workers living in an employers household
•    Residents of certain religious communities
•    Prisoners
•    Armed forces
•    Share fishermen

Government Measures

The government has recognised that in order to fully budget for the additional cost of implementing the NLW, inevitably employers will be reviewing their pay structures and may be considering job cuts.

Accordingly, to offset the impact of the NLW and keep any such job losses to a minimum, the government will also be implementing some beneficial adjustments:

Reducing corporation tax from 20% to 18% over the next five years from 2016-2020
Increasing the annual employment allowance from £2,000 to £3,000 for all business, charities and community amateur sports clubs starting from April 2016.

With NLW coming into play in just a few weeks, businesses need to be prepared.

For some, the impact will be slight, with the majority of staff engaged on a salaried basis at levels sufficient to ‘soak up’ the increase. For others, where staff are hourly paid and margins are low, this material increase is likely to have a real impact, also pushing through to pay-related benefit entitlements (pension, overtime, bonus etc). 

For many, more intelligent use of labour-saving tools will be one answer to improve efficiency and reduce overhead. For others, the implementation of more flexible working arrangements may be beneficial to ensure appropriate (and not excessive) staffing at all times. It is hoped that reductions in staffing will be the exception.

Preparation will be key.
The true impact upon industry more widely will only be known in time.

For any advice please contact our Employment team.