Businesses substitute profit for wages, as National Living Wage eats into investment

43% of start-ups and small businesses have had to increase staff salaries as a result of the minimum wage being increased to £7.50 on 1 April 2017

UK small businesses are substituting profit for staff wages, as the new National Living Wage (NLW) eats into potential investment.

According to a new report by the Federation of Small Businesses (FSB), 64% of small firms, who have been impacted by the NLW rising to £7.50 on 1 April 2017, have dipped into their profits in order to pay employees a higher salary.

24% of businesses have had to cancel or scale down investment plans, 22% reduce staff hours, with 19% tightening recruitment practices and hiring fewer workers.

As a result of the increase, 39% of firms have passed the financial burden onto the consumer, by hiking up their prices in order to cope with the higher expenditure.

It’s suggested that the fast rising NLW is not increasing demand for younger workers, with less than 4% of small businesses responding to the changes by hiring workers under the age of 25 – who need only be legally paid £7.05 an hour.

Employees between the age of 18 to 20 need only be paid £5.60 per hour they work, with young workers between 16 and 17 entitled to a minimum hourly wage of just £4.05.

While the majority of small businesses were already paying their staff £7.50 an hour or more before last April, 43% of small firms have had to increase their wages since.

Sectors facing the greatest squeeze are those with tight margins where wages are typically lower, such as retail, care and hospitality and accommodation businesses.

The FSB has urged the Low Pay Commission to consider whether the government’s 2020 NLW target may need to be delayed if the economy cannot bear the rapid pace of increases.

The NLW is currently projected to rise to £8.75 by 2020, with the FSB recommending the 2018 NLW increases to no higher than £7.85.

Mike Cherry, FSB national chairman, said:

“Small employers have demonstrated their resilience in meeting the challenge set by the National Living Wage, with many cutting their margins, or even paying themselves less, to pay their staff more. In sectors where margins are tight, small firms are resorting to more drastic measures to cope with the NLW.

“It’s vital that the NLW is set at a level that the economy can afford, without job losses or harming job creation. Cost pressures on small businesses are building, and with most recent economic indicators underperforming, we are now facing the reality that the NLW target may need to be delayed beyond 2020.

“To prevent the growing costs of employment from stunting job creation, the Government should use its Autumn Budget to uprate the Employment Allowance and focus it on the smallest employers.”

To read our guide on the National Minimum Wage, click here.

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