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09 Jul 2015
Chancellor George Osborne has declared that Britain deserves a pay rise and unveiled a new compulsory “living wage,” a move that has taken many businesses by surprise.
From April 2016, every worker aged 25+ will be entitled to at least £7.20 an hour – with the figure hitting £9.00 by 2020. This will replace the current £6.50 minimum wage for workers aged 25+.
The increase to £7.20 will mean an 11% rise in hourly pay, with a full-time worker earning over £1,200.00 more than today, it was estimated.
Businesses may find bearing the cost of the Chancellor’s new national living wage challenging. However, this is essentially a double-edged Budget for businesses – as firms will welcome the announcements of both the planned reductions in corporation tax from 20% to 18% by 2020 and holding the annual investment allowance for SMEs at £200,000.00
Critics have argued that this might be favourable for limited companies, but will have very little impact on sole traders and traditional partnerships whose profits are subject to income tax. Indeed, there is no compensatory cut in the tax rate for those businesses. For those small businesses that have incorporated, there’s a raid on their owners’ income where it’s paid through dividends, with a new restriction being placed on the amount of exempt dividend income. Then when you add in the hike in Insurance Premium Tax – 3½% extra cost – then ordinary business costs such as Employer’s and Public Liability insurance, premises insurance, vehicle and plant insurance, are all going to increase significantly.
The Office for Budget Responsibility has said that that the new national living wage will only have a “fractional” effect on jobs. They estimate that by 2020 there will be 60,000 fewer jobs as a result of the national living wage but almost one million more in total.
The CBI business lobby group has said that the Chancellor is taking a gamble by introducing a living wage, claiming that a living wage of £9.00 an hour will mean a rise of over 6% a year at a time when inflation is close to zero: “What happens if there is an economic shock? The risk to business is, it is going to have face some tough choices around what jobs to create – possibly even job losses in some cases.”
Many believe the retail sector will be worst hit, with small shops in particular bearing the brunt. The Association of Convenience Stores has called it a “reckless measure” with predictions that the introduction of a compulsory living wage will have a devastating impact on thousands of convenience stores, leading to retailers having to reduce staff hours, work more hours in their business and ultimately cancel their investment plans.
The introduction of a living wage at a significantly higher level than the current minimum wage will have taken many businesses by surprise. Businesses will now need to start planning as to how they adjust to these changes and whether they need to cut costs to reflecting the increased hourly rates. Inevitably this will have a knock on impact on pay rates generally.
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