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Here is your guide to the National Living Wage and how it impacts you.

The new ‘National Living Wage’ – the minimum wage for those aged 25 and over from April 2016  – has been at the forefront of many business owners’ minds since the announcement of its introduction in July 2015.

From its starting point of £7.20 per hour in April later this year (50p above the current National Minimum Wage), it is projected to rise to more than £9 per hour in 2020. The introduction of the new rate has left some business owners understandably concerned about what the future may hold, particularly those in labour intensive dependent sectors.

The extent of the impact of the new rates will undoubtedly be very uneven across different sectors but, as we have noted before, small shops, hospitality firms, retailers and care providers are likely to be some of the hardest hit by the new reform. These sectors are highly dependent on low-cost labour and work within very tight profit margins. Despite the obvious benefits for employees, employers in these sectors are likely to face major financial challenges in the coming months.

The National Living Rage

Christie + Co has recently released a very interesting new report – is the National Living Wage creating National Living Rage -gauging initial reactions to the National Living Wage’s impact on the UK labour market and specific sectors within the UK. Using some of the findings from that report and analysis from the sector specialists here at Hawsons Chartered Accountants, in this article we take a detailed look at the possible ramifications of the new National Living Wage.

We look at the following sectors:

  • Leisure and Hospitality
  • Retail, Wholesale and E-Commerce
  • Care Homes

The questions we look to answer are:

  • How will the National Living Wage impact that specific sector?
  • What can businesses in that sector do to prepare for the new rates?
  • How can businesses in that sector manage the change and absorb additional costs?

Firstly though, let’s take a look at the overall picture of the new National Living Wage and see how employers have reacted since the initial announcement.

Overall support for the National Living Wage?

A survey by the Department for Business, Innovation and Skills (BIS) carried out in November 2015, asking 1,000 employers across the UK about the new National Living Wage, has found that the vast majority are in support of the new rates:

  • 93% of all bosses agreed the National Living Wage was a good idea
  • 88% said it would make staff more productive
  • 83% believed it would make staff more loyal towards their employer
  • 86% said it would boost staff morale
  • 82% believed customers were likely to return if the business paid the right rates of pay

The survey does also, however, indicate that employers are not yet prepared for the National Living Wage:

  • Around 45% had updated payroll to take account of staff aged 25 and over on 1 April 2016
  • 39% had communicated the upcoming changes to staff
  • 29% had looked online for more information about National Living Wage entitlement

Although the research indicates strong support for the National Living Wage, it must be noted that no details were given on the size and type of employer questioned in this report. It is likely that if the BIS had asked predominately small business owners, particularly those from the sectors we look at in this article, the findings may have been totally different.

The National Living Wage by sector 

This article intends to look at the sectors that will be most impacted by the new National Living Wage, gauging insight into what the possible implications may be and, crucially, how business owners can mitigate challenges and absorb new costs.

Leisure and Hospitality

National living wage hospitality impact

The leisure and hospitality sector performed well in 2015 on the backdrop of an improving marketplace and increasing consumer confidence. However, the impact of the new National Living Wage could slowdown that growth throughout 2016 as businesses look to overcome a significant rise in wage bills.

Richard Burkimsher, Partner at Hawsons, commented: “The new National Living Wage is likely to have a very big industry-wide impact on the leisure and hospitality sector. Hotels, restaurants and pubs all employ large numbers of staff working on the National Minimum Wage, so payroll costs are expected to rise considerably. The reality is that, along with the recent onset of auto enrolment, this is yet another financial burden that businesses within the sector will have to deal with.”

The increase in wage bills across the leisure and hospitality sector will be bigger than any other sector, according to research from The Resolution Foundation (below). The research indicates that wage increases could be nearly six times more than the average across all sectors.

Estimated wage increases by sector by 2020 (Source: The Resolution Foundation)

National living wage hospitality stats

Share of employees affected by the National Living Wage by sector (Source: The Resolution Foundation)

National living wage employees affected hospitality

Richard added: “Even in the leisure and hospitality sector the impact of the National Living Wage will vary from business to business. Location and positioning in the market will be two of the key factors in determining the impact of the new rates on a specific business. For example, those restaurants in city centres – where competition is at an all-time high – may not be able to absorb the costs through increasing menu prices. Restaurants in rural areas of the country, however, will have more opportunities to raise menu prices.”

“With consumer confidence back on the up some businesses may look to pass on the cost increases to customers, but operators cannot keep pushing prices up; the market is far too competitive for that. Ultimately, a lot of operators will have to absorb the additional costs themselves and find alternative means of cutting costs, such as achieving operational efficiencies.”

Martin Wilmott, Partner at Hawsons, recently featured on the Hotel Magazine website discussing the opportunities for energy efficiency in the leisure and hospitality sector.

See below for possible ways to absorb costs and how we can help.

Retail, Wholesale and E-Commerce

National living wage retail impact

As with the leisure and hospitality sector, the retail sector had also seen steady growth in 2015 and has continued to be a vital part of wider economic growth in the UK. It too also employs a large number of staff who will be affected by the new National Living Wage.

Pete Wilmer, Partner at Hawsons, commented: “Retailers are going to be one of the hardest hit by the introduction of the new National Living Wage. Despite a big shift in the use of technology across retail – through online shopping and the growing usage of self-checkouts – retailers still rely heavily on staff; whether that’s on the shop floor, in the warehouse, in customer service or further down the supply-chain.”

“That last one, down the supply-chain, is possibly the key aspect to consider here; it’s not just wage bills that retailers will see increase with the new National Living Wage, but also the prices suppliers charge as they too look to pass on the cost of paying the additional rate. This is of course relevant for all sectors, but I think particularly for retailers who rely heavily on a cost-efficient supply-chain process.”

Research from The Resolution Foundation (below) indicates that the wage increase for businesses in the retail sector could be over three times more than the average across all sectors.

Estimated wage increases by sector by 2020  (Source: The Resolution Foundation)

National living wage retail stats

Share of employees affected by the National Living Wage by sector (Source: The Resolution Foundation)

National living wage employees affected retail

Pete added: “The sector is likely to face some major challenges over the coming months, which will have a knock-on effect on inward investment, recruitment and staff retention plans.”

“With more consumers looking to buy on the move and preferring to make purchases on the retailer’s website rather than on the high street, we could see an even bigger focus online. In theory, this could save staffing costs…but when you consider the costs of web developers, cyber security experts and so on, a move to selling online may not be the cheapest alternative. Of course you need a balance between the two, but it is important retailers consider the increased costs that come with scaling online sales.”

See below for possible ways to absorb costs and how we can help.

Care Homes

Care&NursingHomes

The care sector has faced a number of major challenges in the last 18 months and the impact of the new National Living Wage is the care sector is something we have spoken about in detail already. The impact of this new rate should really not be understated.

Scott Sanderson, Healthcare Specialist and Partner at Hawsons, commented: “Unlike the two sectors reviewed above, operators in the care sector do not always have the opportunity to raise prices in order to offset the additional costs associated with the National Living Wage. Those homes with a high number of private residents possibly can but, for the majority of homes, councils are facing their own funding constraints and cannot agree to fee increases.”

“The announcement made in the recent Autumn Statement for care homes gives cautious optimism, but will likely not be enough on its own to provide the much-needed financial support operators are asking for.”

Research from The Resolution Foundation (below) indicates that the wage bill increase for care homes could be as much as four times more than the average sector.

Estimated wage increases by sector by 2020 (Source: The Resolution Foundation)

NLW residential care stats

Share of employees affected by the National Living Wage by sector (Source: The Resolution Foundation)

NLW employees affected residential care

Scott added: “With the opportunity to increase revenues few and far between, and a parallel match in additional public funding looking unlikely, the majority of care homes must prepare to absorb the significant costs that the new National Living Wage will bring.”

See below for possible ways to absorb costs and how we can help.

All sectors

Looking at the research from The Resolution Foundation (below) it is clear that the impact of the new National Living Wage will have a varying impact across UK businesses. Some sectors, such as construction, transport, manufacturing and finance will see a much smaller rise in the wage bills than the sectors we have already spoken about in this article, as well as agriculture and support services.

Estimated wage increases by sector by 2020 (Source: The Resolution Foundation)

National living wage increases in wage bills by sector

One of the other things to consider – as well as the possible increases in supplier prices as mentioned above – is the possible increase in wage bills for other members of staff, who are not under 25 or working on the National Minimum Wage.

It is important to keep wage differentials across any business (in any sector), that reflect the qualifications, experience and role responsibilities of a member of staff. For example, if a barman sees a 50p increase in his hourly pay through the introduction of the new National Living Wage, then the bar supervisor may also expect to see a 50p increase.

It is extremely important that employers take the time to consider the possible indirect financial implications and increases in output costs that the new National Living Wage will bring.

Absorbing costs and how we can help

The Department for Business, Innovation and Skills (BIS) is advising employers to begin preparing for the introduction of the new National Living Wage. Businesses are being advised to prepare early for the changes on 1 April 2016, when the new wage will become law, and make sure they follow these 4 simple steps.

  • Know the correct rate of pay – £7.20 per hour for staff aged 25 and over
  • Find out which staff are eligible for the new rate
  • Update the company payroll in time for 1 April 2016
  • Communicate the changes to staff as soon as possible

As we have mentioned above in this article, the financial implications (both direct and indirect) of the new rates will bring major challenges to a number of UK businesses. It is therefore crucial that, with just three months left, employers take the necessary steps to make sure they are ready for April 2016.

National living wage business impact

Here is a quick overview to what businesses could / should be doing to prepare for the National Living Wage:

  • Evaluate the total additional costs that your business will have to pay;
  • Consider possible ways the business can improve efficiencies (e.g. technology);
  • Work out how to maximise the value for money you get from staff;
  • Consider outsourcing your payroll to save time and money;
  • Look at performance benchmarking to assess ways to improve profitability;
  • Look at news ways and review current strategies to attract new clients / customers / guests;
  • Consider renewable energy to counteract the cost of rising energy bills;
  • Ensure accounting records and up-to-date and constantly monitor financial sustainability;
  • Ensure the business maximises all available tax reliefs, particularly if refurbishing a property.

As experienced Chartered Accountants our dedicated sector teams are  well-placed to advise and help businesses in preparing for the new National Living Wage. We also work closely with our in-house tax and payroll specialists to provide businesses with a comprehensive and fully integrated service.

For more information on how one of the leading firms of accountants can help you, please contact your local Hawsons specialist today – or sign up for our sector news.

We offer all new clients a free intiial, no-obligation consultaiton so please contact your local office today.

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