Are you prepared for the introduction of the Living Wage?

At the recent Budget, the Chancellor announced a new “living wage” to replace the “minimum wage” which is currently operating.  On the face of it the proposal is a very positive move to increase employee income however for many firms it will substantially increase payroll costs.

Currently the minimum wage is set at £6.50 an hour for employees over 21. The proposed changes will increase the rate to £7.85, an increase of some 21%. It is likewise proposed over a five year period to increase to £9.50 giving a gross increase of 46%. Whilst it could be anticipated that “cost of living” increases would have been paid, say at 3.5% this would take the rate to £7.72 or a 19% increase which is considerably lower than the 21% increase of the new living wage. To achieve the living wage rates this would equate to about a 7% annualised increase, which perhaps is not being achieved in terms of price increases for the employers.

However there are, of course, always hidden issues in such proposals and it would seem that whilst the “living wage” is very welcome for workers, the effect on employee grading’s will be even more significant.

Employees on minimum wage will have Supervisors, Charge Hands, Assistant Managers, Managers etc. and currently there will be pay differentials between the various management levels.  It is not unreasonable to suppose that the employees in the higher tiers will expect these differentials to be maintained and not eroded by the introduction of the living wage.

It will also need to be recognised that more employees could fall into National Insurance limits increasing further the commitment on employers already facing the added costs of auto-enrolment Employee Pension benefits.

This is all happening within an environment where Corporation Tax will reduce to 19% from 20%, a move which will help companies but smaller businesses who are unincorporated could be significantly affected by the proposals and there could be substantial benefits in incorporating the business.

To help you through this minefield we can help you to calculate the effect of the changes on your business and to plan, understand and manage the effect of this legislation together with advice on the most appropriate structures in which to operate your business to meet the new challenge.