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UK National Living Wage

UK introduces new National Living Wage

On Friday (1st April 2016) the new National Living Wage (NLW) came into effect in the UK. Affecting all workers aged over 25 who were previously eligible for the National Minimum Wage, the new rate puts another 50pence per hour worked into the pockets of the nation's lowest paid workers. 

The Regulatory Policy Commission (RPC) reviewed the proposal for the National Living Wage in 2015 prior to its implementation, and declared it fit for purpose at a starting rate of £7.20/hour. This is expected to rise each year in line with the National Minimum Wage (currently £6.80), and the government has publically announced an aspiration for the NLW to reach 60% of median earnings by 2020 (expected to be around £9/hour). 

Who is affected?

What will the costs be to UK business?

The Commission's review addresses the costs of the new rate of pay for businesses, and estimates that approximately 1.7 million employees in the private sector will be affected by the change, with a cost of £804.4million. This figure is comprised of £672million in higher wages and £132.4million in associated non-wage labour costs, such as employers' National Insurance contributions. 

On top of this, the RPC also predicts 'wage spillover' costs, whereby the wages of employees already earning more than £7.20/hour are also raised by employers in order to maintain wage differentials between workers. Using Low Pay Commission (LPC) evidence and ASHE wage distribution data, it is estimated that this will cost roughly £234.3million. The majority of this extra cost is indirect, as it results from the discretionary choice of the employer to go beyond the requirements of the regulations. However, in some circumstances wage differentials may be stipulated in contracts or bargaining agreements with trade unions, and in these instances maintaining the wage differential is not discretionary and represents a direct cost to business. It is estimated that £37.7million of the £234.3million would be a direct cost to business. 

Additionally, businesses will incur further costs in transition and familiarisation processes. The Department for Business, Innovation and Skills estimates that in 75% of businesses, a senior manager will spend 30 minutes reading the NLW guidance (based upon survey evidence that 26% of employers are already fully aware of the NLW). This results in a cost to business of £12.1million. Changes will have to be implemented within payroll systems, which the Department estimates will take an administrator roughly 30minutes for each employee's records which must be updated (based on the CEBR-Federation of Small Businesses employment costs index), which will cost roughly £10.5million. This results in total transition costs of roughly £22.6million. This is considered to be an estimate which errs on the side of caution, as familiarisation will be assisted by an awareness campaign, and payroll software may make the process more efficient for larger businesses, saving money. 

Including costs to public sector employees, the total cost of the proposal is estimated to be roughly £1,139million (£835.6m direct labour costs, £280.5m wage spillover effect, £22.6m transition costs).

There are also wider, macroeconomic effects to consider. The Department estimates that structural unemployment will increase as a result of the 2016 uplift by approximately 9000, or 0.03 percentage points, and that hourly productivity will increase by 0.05 percentage points. 

What about small and micro businesses? How will they cope?

It is recognised that small and micro businesses will be disproportionately affected by the change, with 16.2% of employees in micro firms and 9.7% in small firms now being covered by the NLW, in contrast with only 5.8% in larger firms. It is argued, however, that because 32.8% of workers previously earning less than the NLW are employed by small and micro businesses, any exemption would undermine the objectives of the policy. It is further suggested that were an exemption to be applied, it would result in a competitive distortion, and given the large share of total costs accounted for by labour, create a significant disincentive for small businesses to grow. 

To account for the issues small and micro businesses may encounter, measures will be implemented to mitigate the effects of the NLW. There will be an increase in the employer allowance, a communications campaign and guidance for employers which will target small and micro businesses. 

How can I prepare?

For workers, all you need to do is check your next payslip after the 1st April and make sure, if you are over the age of 25 and were previously being paid National Minimum Wage (£6.80/hr), that you're now being paid at least £7.20/hr. 

Companies and organisations need to do a little more. First, they need to check who within their organisation is eligible for the rise. Then, the appropriate payroll action needs to be taken and staff should be informed of their new pay rate. Finally, it's important to double check that any staff under the age of 25 are being paid the correct rate of National Minimum Wage. 

Need more information? Check out HM Government's National Living Wage page or, for employers, take a look at their notes and guidance for employers.

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