At the start of the year the government unveiled the next phase in its ongoing plan to boost both the National Minimum Wage (NMW) and the National Living Wage (NWL) to tackle wage inequality and rising living costs.
It’s now confirmed that from 1 April 2020, the NMW will increase by up to 6.5% whilst the NLW, applicable to those aged 25 or older, will increase 6.2% from £8.21 to £8.72.
The most significant hikes in NMW and NLW to date, these new rates will undoubtedly be well-received by the 3 million people set to benefit and will contribute to the fight against wage poverty and inequality. However, the impact on employers’ profitability, and the wider economy could in fact risk triggering reduced employment levels and thus weaken these beneficial effects.
Economic focus – The domino effect
The increase will put a great deal of pressure on profitability in sectors such as hospitality and retail which employ many staff on lower wage levels. However, it is not just those at the lower end of the pay scale to consider; if a junior gets an extra 50p an hour (nearly £1,000 a year) that can have a knock-on effect on wage increases for more senior staff if the narrowing or eclipse of the pay differential is to be avoided.
A recent survey of hospitality pay levels revealed that employers are already paying a premium above NLW to attract and retain the best staff. In January, the average wage for 21 to 24-year-olds was 56p above April’s new rate, the figure for 18 to 20-year-olds being an even bigger surplus of £1.61.
This survey follows a 2.5% rise in hospitality wages to £8.84 in January, well in advance of the April increase date. Continued increments are possible up to April and this, together with low unemployment and a shrinking pool of EU workers (a concern magnified by the recent confirmation of a qualification and points-based immigration policy), could produce spiralling labour costs.
Futureproofing to preserve
The increasing minimum wage is a continuing and accelerating theme which will not change anytime soon – necessitating re-evaluation of plans and long-term strategies by employers.
To offset rising employment costs in the longer term, companies will need to investigate solutions such as smart productivity programmes (including labour scheduling apps), reducing headcount, automation, or passing the cost onto consumers in the form of higher prices – particularly in the hospitality sector. But in the shorter term it nevertheless poses great risk, particularly in competitive marketplaces, and begs the question – will such markets be able to withstand the pressure?
An opportunity to accelerate exit?
For some business owners, especially those ill-equipped to absorb any more cost inflation (whether through efficiencies or lost margin) now may be the optimal time to exit. Another topical factor influencing exit timing is the mounting pressure facing CGT Entrepreneurs’ Relief, and the risk of this being abolished or, more likely, trimmed and a longer-term wind-down announced in the next budget. Its removal would deal business owners another blow, doubling the tax on gains crystallised on a sale from 10% to 20%, and diminishing the net proceeds of entrepreneurs (many of whom regarded their business as their pension).
As with any exit plan, preparation is key, and it is important to take advice to plan and evaluate options thoroughly. So, whether you would like to revaluate your exit strategy or would like advice on offsetting rising employment costs, Smith Cooper can help you formulate a strategy.
We have experts across a range of skill disciplines that can pool resources to deliver innovative, commercially astute, viable, tailor-made solutions that align with your corporate and personal objectives. To arrange an initial consultation, please get in touch.