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The National Living Wage

Updated: Feb 16

The announcement of the National Living Wage in 2015’s Budget took many by surprise, and speculation immediately began on how it would affect employers and their workers. Find out the details you need to know in our article.

One of the most surprising measures in this year’s budget was the announcement of a compulsory National Living Wage (NLW), which will begin at the rate of £7.20 in April 2016 and then be increased every April thereafter at the recommendation of the Low Pay Commission. It is envisaged that the rate of increase will be such that by April 2020, the NLW will be at least £9.

The NLW will apply to working people over the age of 25.

The Office for Budget Responsibility (OBR) said that there would only be a ‘fractional’ effect on the number of jobs in the UK, with 60,000 jobs being lost by 2020 but almost a million more being created.

It’s believed that the cost to business will be about 1% of profits, but this may be offset by a reduction in corporation tax and a reduction in national insurance contributions for small firms.

The National Minimum Wage (NWM) is currently set at £6.50 and that will rise to £6.70 in October this year.

In April 2016, everyone over 25 will see the hourly rate rise to £7.20. From the current level of NMW, this is an 11% increase.

The National Minimum Wage will still apply to workers below the age of 25.

The National Living Wage should not be confused with the UK Living Wage, which is set by a body called the Living Wage Foundation. Their figure is £7.85 for the UK outside London, whilst workers in the capital covered by the scheme enjoy a rate of £9.15. Compliance

It is worth employers considering how the National Living Wage will be enforced. For the administration of the Minimum Wage, the fact that it applied to everyone over the age of 21 made it easier to apply. With the NLW, there will be two bands – the National Minimum Wage for those between 21 and 25, and the NLW for everyone over that. If a company employs workers from both these age bands (and virtually all employers do so) they will have to put new measures in place to ensure that both sets of employees are paid correctly.

Since the National Living Wage is effectively being presented as a premium on top of the NMW, it will continue to be enforced in the same way, with HMRC acting on either a complaint from workers, third parties or risk profiling of key low-pay sectors, then carrying out an investigation into the employer’s business which will consist of a review of payroll records, interviews with the employer, payroll staff and workers.

Implications for employers

The introduction of the NLW could have a significant effect on employers in particular sectors where pay has historically been low. These include the hospitality industry, retail, community services, public sector health & education. At a time when many employers are struggling to cut costs in order to remain in business, an 11% rise in wage costs could cause them real problems.

It is also worth bearing in mind that the review date for the National Living Wage will be April, rather than October, which may mean that employers need to restructure their budgets accordingly. Of course, if they employ workers both above and below the age of 25, there will be two review dates.

When pension auto-enrolment is fully active, the combination of this with the NLW could cause further problems for small businesses.

Another point to bear in mind is that an increase in rates of pay for some workers may mean that those who are currently being paid more may see an erosion in their differentials and ask for a pay rise of their own. Employers should anticipate this and have their strategies ready in advance.

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