How will the new 'National Living Wage' impact UK SMEs?

George Osborne recently presented a Summer Budget full of measures that are intended to boost the UK's economy. While incoming changes will affect everything from Inheritance Tax to defence spending, it was the announcement of a National Living Wage (NLW) that really caught the attention of small business owners.

As of April next year, the NLW will be £7.20 for over 25s, and this figure will rise to £9 an hour by 2020. While 2.7 million workers will have their salaries boosted by these changes, higher wages could put pressure Britain's SMEs.

Setting the scene

It might seem like SME owners should be thrilled by the Summer Budget: Corporation Tax will be cut from 20% to 18% by 2020, and Employment Allowance will increase by £1000. However, the introduction of 'auto-enrolment' pension legislation offsets most of the savings created by these reforms. This means that many small businesses will have to create and finance staff pension plans from scratch.

What are observers saying?

The NLW is dividing business owners. James Poyser, co-founder of accountancy firm inniAccounts, says:

"There’s no doubt that the vast majority will find it difficult to fund it (the NLW) in addition to the new cost of pensions. Many small business owners have to pay themselves far below the National Minimum Wage to survive and this will only serve as a barrier..."

On the other hand, Michelle Wright, CEO and founder of Cause4, takes a more positive view:

"I think it's good that all businesses will need to pay the National Living Wage...employed staff should be able to live comfortably."

Potential impact

News of higher wages and pension contributions sounds like a win for workers. However, forcing small businesses to run on tight margins may actually impact employees negatively in the long run – restricted growth could mean more failed SMEs, and ultimately, fewer jobs. Small business owners can makes things easier by ensuring that they aren't writing off supplier debts and waiting for late invoices; higher wages mean that monthly payroll costs will grow, and businesses should respond to this change by making sure that their finances are liquid enough to cover their outgoings.

If you're an SME owner who's worried about the new NLW, contact Dukes Bailiffs to discuss how sensitive debt collection could make the change easier to handle.