How is the National Living Wage increase going to effect my business?

This article was initially published in January 2022 back when now Prime Minister Rishi Sunak was Chancellor. In the 2021 Autumn Statement Rishi Sunak announced a 6.6% increase to the national living wage. Fast forward 12 months and in this year’s Autumn Statement, Chancellor Jeremy Hunt announced a further increase to the national living wage. Whilst the principles of the original article remain, the figures have been updated to reflect the latest announcement.

The national living wage increase

In November’s Autumn Statement, Chancellor Jeremy Hunt, announced an increase to the national minimum living wage. Coming into effect from 5th April 2023, the national living wage for a full-time worker aged 23 and over will increase from £9.50 to £10.42 an hour which represents an increase of 9.7%.

National living wage and minimum wage rates

 23 and over21 to 2218 to 20Under 18Apprentice
April 2022
April 2023£10.42£10.18£7.49£5.28£5.28
National living wage and minimum wage rates

How much will the national living wage increase cost my business?

Whilst this is a welcome change for employees, given their annual salary will increase to £21,673.60 before tax*, for employers it adds additional costs into businesses at a time when some are struggling . Based on this increase, for every worker* employed at the national living wage an additional £1,913 will be added to your wage bill. It is this compounding effect, that will impact businesses.

*Calculation based on 40 hours per week x 52 weeks

Example illustrating the cost of the wage increase

For illustrative purposes our client has 3 retail units employing 5 individuals in each (15 employees in total). There are 3 store assistants in each store on the National Living Wage plus an Assistant Manager and Store Manager.

 Current Wage BillOption A**Option B**
X 9 Store Assistants on National Living Wage£177,840£195,062£195,062
X 3 Assistant Managers£72,000£72,000£78,984
X 3 Store Managers£81,000£81,000£88,857
Example illustrating the cost of the wage increase

Calculation based on 40 hours per week x 52 weeks

** Option A – 9.7% pay increase for Store Assistants

** Option B – 9.7% pay increase for ALL employees

This shows a minimum of £17,000 that needs to be budgeted for to reflect the increase in the national living wage (excluding the additional national insurance and pension that may also increase).

Implementing the national living wage increase

The national living wage sets out the minimum pay per hour workers are entitled to and must be enforced by employers.

In the illustration above, we included two options for employers to consider. Whilst employers are not obliged to revise everyone’s salary, the change will bring the store assistants’ monthly salary to within £200 of the Assistant Managers.  One way to manage this would be to introduce a 9.7% pay increase for all employees but this does mean incurring a further increase to your wage bill. The positive impact on employee morale could however justify this cost.

So, could businesses be considering other options? Again, this raises the question of balance between morale and financial sustainability for the business. For example, amending trading hours to enable a reduction in the working week from 40 hours to 37.5 would mean you could maintain your wage bill at its current rate whilst still implementing the higher national living wage. Obviously if this type of drastic option is to be considered then professional HR advice should be sought beforehand to ensure the correct process is followed. If you’d like to discuss this with a suitable HR professional then please contact us and we can refer you to one of our trusted partners.

What will increasing the national living wage achieve?

Increasing the national living wage provides consumers with an extra £1,600 per year. By implementing this change is the government trying to encourage spending, support families with the soaring cost of bills or encourage saving? With inflation at its highest since 1992, encouraging people to spend is perhaps the least likely option. On the contrary, retailers with rising wage bills will want consumers to be spending more to cover these additional costs.  

The impact of increasing the national living wage is of course relative to individual circumstances. Instead of waiting until the changes are implemented and looking back in hindsight wishing you had taken a different course of action, it is useful to consider the impact in advance so you can plan accordingly and address the wider repercussions.  

For further information about the impact of the increasing national living wage, get in touch with the team. Whether it’s a question relating to payroll, budgeting or cashflow we will be happy to help. Simply call 0800 112 0880 or email [email protected] – a growing business needs more from their accountant.

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