New minimum wage: How should your business prepare?

The new minimum wage will be introduced from 1 April. How can employers prepare for the increased cost?

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Workers on the minimum wage will get a pay rise on 1 April 2022, as the rate for those aged over 23 increases to £9.50 an hour. For employees, this may feel a modest step up from the previous rate of £8.91 per hour, but it has big implications for businesses paying their staff.

With inflation rising to 5.1% in the UK – its highest in a decade – the government has faced pressure to help low-paid, younger workers, who are among the worst hit by the pandemic amid a steadily rising cost of living.

Small businesses are already shelling out for the added costs of fuel, energy and supplies, so for many employers, the minimum wage rise couldn’t have come at a more challenging juncture.

As the 1 April approaches, we look at how the new minimum wage will affect small business costs, plus savvy ways to minimise the impact.

Get expert help with paying your staff – see our guide to the Best Small Business Payroll Services

What is the new minimum wage?

When it is introduced in April, the new National Living Wage for over-23s (otherwise known as the minimum wage) will be £9.50 an hour. This is a 6.6% increase on the previous rate.

Minimum pay rates for younger workers are also set to go up.

  • National Living Wage for over-23s: From £8.91 to £9.50 an hour
  • National Minimum Wage for those aged 21-22: From £8.36 to £9.18
  • National Minimum Wage for 18 to 20-year-olds: From £6.56 to £6.83
  • National Minimum Wage for under-18s: From £4.62 to £4.81
  • The Apprentice Rate: From £4.30 to £4.81

It does not matter how small you are as an employer, you will still have to pay the correct minimum wage.

Business leaders must keep records to prove they are paying at least the minimum wage to their staff. In a dispute at a tribunal or civil court, the burden is on the employer to prove that the minimum has been paid.

Lawrence Kaplin, Chief Market Strategist at international business payment platform Equals Money, said that the rise in minimum wage could be healthy for the UK economy in the long-term. However, it is unlikely to have a positive impact in the current climate of post-Covid recovery:

“Our economy here in the UK is 80% service-based, meaning that any recovery from the pandemic is ultimately tied to encouraging consumer spending. An increase in living wages can boost spending, but increased consumer spending is unlikely with concerns about rising fuel and energy prices as well as inflation.”

How will this affect small businesses?

According to card payment provider Take Payments’ 2021 business trends report, one in four (28%) of SME respondents said they think the government should offer them extra support to help cover the minimum wage increase.

That’s because, for many UK startups and small businesses, the new minimum wage represents yet another restriction on growth in a two-year period that’s been plagued by the coronavirus outbreak, Brexit, and a whole host of supply chain issues including rising petrol costs and impact of customer cancellations.

Earlier this week, we reported that inflation is now the top concern for UK SMEs – who are not protected by Ofgem’s domestic consumer price cap. 46% of respondents in an Iwoca survey said increased running costs are a main concern for their business in 2022.

Particularly hard hit have been those companies based in customer-facing industries, such as tourism, hospitality and leisure. Indeed, ONS data shows that in July 2021, consumer spending on hospitality remained at less than 70% of pre-pandemic levels.

Managing Director of business advisors and insolvency experts Forbes Burton, Rick Smith, said: “Wage rises have their place, but the timing of these increases couldn't be worse, small businesses need to get back to where they once were with solid foundations.

“Businesses are likely to be faced with the task of regaining stability as well as instilling supplier and customer confidence. This rebuilding takes time and won't be a quick fix.”

Let’s have a look at how the minimum wage will impact SMEs:

Added strain on finance

On average, the rise means a full-time worker will now be paid £1,074 extra a year (pre-tax).

However, an increase to the National Minimum Wage means more expense to the employer than just wages. It’s also an increase to associated costs, including National Insurance and holiday pay.

In September, the government chose to raise National Insurance. Under the change, also due to come into effect from 1 April, employers and employees will each be taxed an additional 1.25 percentage points.

That means employers will pay an additional £241.87 a year of National Insurance tax for each member of staff.

Combined with the National Insurance hike, the new minimum wage means SME leaders will be hit with a hefty tax increase on 1 April.

Difficulties hiring

A further challenge is that the competitive hiring market means many businesses will struggle to compete for applicants if they only offer minimum wage.

Many startups and small businesses that have avoided the worst economic effects of the Covid-19 crisis, such as those in tech or other thriving industries, will be more able to absorb the costs than businesses based in offline sectors.

These businesses often choose to pay the so-called ‘Real Living Wage’ to staff members. This is considerably higher than the National Minimum Wage at £9.90 in the UK (£11.05 in London) and can therefore get ahead of the competition when it comes to recruitment.

Earlier this month, for example, Sainsbury’s announced it plans to pay staff £10 per hour, increasing its minimum wage from £9.50 to compete with fellow supermarket retailers Lidl and Aldi.

But, for a small business such as an independent grocery store, this introduces the challenge of competing with the wages of supermarket giants.

Anoop Rehal is partner at Haines Watts, a chartered accountants. Rehal told us that businesses which can only offer the National Minimum Wage will find it harder to attract and retain talent once the new rate is introduced.

“The construction sector is a good example of this – the competition for talent is fierce at all levels, wages are rocketing and valuable people are constantly moving for better pay.

“Competition for staff in most sectors is relentless. This makes it an employee’s market and it is difficult to see start-ups that can only offer the National Minimum Wage being able to secure workers or retain the workers they have.”

Read our expert guide to find out more about how to recruit new talent in a hiring crisis.

Increased staff satisfaction

On a more positive note, increasing pay is also necessary for ensuring that employees are being properly supported, and that wages remain in-line with the rising cost of living.

Corporate social responsibility (CSR) is becoming increasingly important to employees and potential investors. Boosting pay will not only help your CSR credibility, but will also ensure high levels of staff satisfaction, which helps with productivity and overall financial result.

Employment expert Simon Gilmour, from Harper James Solicitors, highlighted the benefit that a new minimum wage could bring to employee performance and productivity:

“Workers who are happier with their levels of pay are more likely to be more productive and satisfied in their roles, which in turn increases the chances of them staying with your business.

“That’s why business owners should also regularly review all employees’ wages and pay rates, and reward staff when they can for good service.”

What can SMEs do to absorb the added cost?

There’s no way to get around paying your staff the minimum wage. It is, after all, a legal requirement.

You could be forced to pay a steep maximum penalty of 100% of an employee’s annual wages if you are found to be underpaying staff.

Failure to comply could also result in prosecution and an additional fine. But there are ways to get ahead of the effects of a rise in minimum wage, or indeed any government tax increase.

Simon Gilmour, employment partner at Harper James Solicitors, said there are several things business owners could do to prepare for the minimum wage rise.  

“The key for any change of this nature is to be prepared. All businesses should start by reviewing how the alteration of the wage rates could impact their outgoings.

“Nobody wants to cut staff levels and for those businesses which aren’t able to absorb the costs associated with such changes, there are several steps they might look to take before having to go down that road.”

Below, we outline four simple tactics you can use to start bringing more money in and/or reducing the amount of money flowing out of your business.

Cut expenses

Take a look at what your current operating costs are and ask yourself: how could these be scaled back?

Where appropriate, even small changes can help to reserve your company’s cash flow. Common ways to limit expenses include:

  • Cutting down on office space
  • Minimising your energy bill by switching suppliers if possible
  • Turning off lights, appliances and machinery after hours
  • Reducing paper use
  • Buying used equipment

Reduce hours

Another way to limit labour costs without causing redundancies is to reduce staff hours to short-time working.

For example, you might ask an employee to work a three-day week, instead of a five-day week.

Reducing a worker’s hours is an entirely legal process. But the one consideration you’ll need to make is to ensure that you keep your employees well informed during the process. Remember: you can’t make any changes to an employee’s contract without them first agreeing.

If you reduce staff hours without a staff member’s compliance, they’ll still be entitled to a full-time wage. It could also result in legal consequences for you, such as a claim for a breach of contract.

If you’re unable to reach an agreement with your employee, you may also consider a forced reduction in working hours. This involves dismissing and re-engaging the same member of staff under the new contract.

Such a drastic approach should definitely be considered a last resort, however, as it is not a great way to encourage staff loyalty.

Change your service offering

One common solution for business owners to reduce labour costs is to consider increasing what you charge.

No business really wants to increase prices – and you should be very careful when making this decision. It can have a harmful effect on your customer base, and also make your business stand out less from the competition.

Be sure to communicate with your customers so they know what to expect. Also examine what your competitors charge, so you can be sure your customers won't flee for more cost-effective alternatives.

If you want to avoid this more drastic scenario entirely, however, then there is another, related way to make your service offering more cost-efficient, as Simon Gilmour, employment partner at Harper James Solicitors, advises.

“Think about whether you might streamline your business offerings. When new cost challenges emerge, cutting back offerings with small profit margins can be an efficient way of saving money.”

If you’re a beauty salon, for example, look at which beauty treatment is making you the most money, and which the least. That will help you to determine the areas where you can save money by reducing spend on materials and labour.

Financial assessment

One of the most important ways to prepare for any tax increase is to make sure you have a strong understanding of your current financial position.

Speak to a third-party financial expert to get a run down of the costs and make sure you can afford the new payrolls.

If you have growth plans in place, make sure you’ll have the capital available to enact them once you’ve incurred any added costs from the change. Now is also a good time to look at the type and levels of your debt.

If you’re short on money, investing in accounting software is a sensible, low-budget way to track your company cash flow, revenue and expenses. This will make it easier to keep an eye on your financial situation once you begin paying a higher wage to employees.

Read our comprehensive guide to the best free accounting software solutions for small businesses, and get started today for zero charge.

What help is available?

If you’re struggling financially as a consequence of the minimum wage rise, government support is now available to ease some of the burden for customer-facing firms, such as those in the travel, leisure and hospitality industries.

Hospitality and leisure firms in England, as well as their supply chains, are now able to apply for Local Authority grants of up to £6,000 as part of new government support introduced to lessen the impact of Omicron on small businesses.

More than £100m is also being made available to the Additional Restrictions Grant fund, which councils can give out at their discretion to businesses in need.

Similarly, Scottish SMEs will be contacted by their local authority to access a share of the £107m support fund through the December and January Business Top Up. The Welsh Government has announced that £120m will be made available for leisure and hospitality firms, and has also decided to extend support to non-essential retail SMEs.

You can find other government finance help on the gov.uk website, which outlines the various support schemes available including VAT deferral.

Conclusion

Minimum wage increases are a fact of life for the business world. But while it can be tempting to see the new rate as another burdensome tax rise, small business owners shouldn’t underestimate its benefits.

Your staff are one of your most important resources and raising their wages should be seen as an investment in your company.

Simple operational and behavioural changes can help to accommodate the change. If you plan accordingly, and use finance software or third-party consultants, minimum wage increases don't have to be an obstacle to growth. Instead, they can be a benefit for both your business and your employees.

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Helena is from Yorkshire and joined Startups in 2021 from a background in B2B communications. She has previously written for a popular fintech startup covering everything from money-saving tips to cultural reviews.

She is particularly interested in project management software and the films of Peter Jackson.

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