“I’m ringing to find out how much the national living wage increase in April is going to cost my business so I can get planning for it.”
Focal Business Group Client
This was a query we received from one of our retail clients which, on the surface appears to be a relatively simple question but perhaps not.
The national living wage increase
In the Autumn budget, Chancellor Rishi Sunak, announced an increase to the national minimum living wage. Coming into effect from 5th April 2022, the national living wage for a full-time worker aged 23 and over will increase from £8.91 to £9.50 an hour which represents an increase of 6.6%.
National living wage and minimum wage rates
| 23 and over | 21 to 22 | 18 to 20 | Under 18 | Apprentice | |
| Current | £8.91 | £8.36 | £6.56 | £4.62 | £4.30 |
| April 2022 | £9.50 | £9.18 | £6.83 | £4.81 | £4.81 |
How much will the national living wage increase cost my business?
Whilst this is a welcome change for employees, for employers it adds additional costs into businesses at a time when some are struggling to re-establish trading levels. Based on this increase, for every worker* employed at the national living wage an additional £1,227 will be added to your wage bill. It is this compounding effect, that explains the purpose of our client’s call.
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 Bill | Option A** | Option B** | |
| X 9 Store Assistants on National Living Wage | £166,795.20 | £177,840 | £177,840 |
| X 3 Assistant Managers | £60,000 | £60,000 | £63,960 |
| X 3 Store Managers | £75,000 | £75,000 | £79,650 |
| TOTAL: | £301,795.20 | £312,840 | £321,450 |
** Option A – 6.6% pay increase for Store Assistants
** Option B – 6.6% pay increase for ALL employees
This shows a minimum of £10,000 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’ salary to within £300 of the Assistant Managers. One way to manage this would be to introduce a 6.6% 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 £100 each month. 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.