The living wage of £7.20 per hour came into effect on Friday 1st April for employees aged 25 and over but how does this affect employers and how does this benefit employees?
On my drive to work this morning the media are still talking about how employees will have an extra 50p per hour in their pay packet but this is not strictly true. Employees earning over the thresholds for tax and national insurance will lose 20% of that 50p to tax and 12% to national insurance, leaving them with an increase of 34p per hour. The pension contribution of 1%, then 3%, then 5% will reduce this pay rise minimally but the pension contribution on their total earnings may well swallow up a good proportion of the rest of the pay rise. So out of the 50p per hour increase employees gain 34p and the Government gains 16p. The benefit to employees is therefore 34p per hour not 50p. Employees earning under the tax and NI threshold will, of course, receive the full 50p per hour.
So how does this pay rise affect employers? Apart from costing them an extra 50p per hour it will cost them the employers national insurance contribution of 13.8% making the new hourly rate 57p. Many small employers have reached their Staging Date or are about to in the next few months and the increase in pay will push more employees into the threshold to be auto enrolled in a pension scheme. This will cost the employer an additional 1%, then 2%, then 3% of the total wages. It will also mean that many employers in businesses which traditionally use part-time staff who may be working just a few hours each week and therefore were not earning enough to be eligible for auto enrolment may now be eligible to join. The employer will therefore also have to cover the costs of setting up a pension scheme even if the employees decide not to join.
How have business owners planned to cope with this pay rise, after all it is not a choice, but could have a significant effect on businesses in industries where margins are tight?
Hopefully they will not just shut up shop but will look at managing their business more efficiently. Many will be able to put up their prices to cover the extra costs but many will not be able to if competition is tight. Some business owners will reduce numbers of staff or their opening hours. Some will reduce the hours staff work and encourage everyone to work more efficiently. Some business owners will know that their staff are important to their business and will look at cutting other costs.
As a business owner do you regularly review your direct costs and overheads to see where you can make savings? Its always worth seeing if you can get a better deal from your suppliers or from new suppliers. Utility costs are an area where you could make savings - when you are out of contract you could be paying more than if you were in a one or two year contract. Insurance costs should be regularly reviewed too. And do you really look at what you are paying for? Are they all things you need to have for your business to trade?
This is a good time to really look at your costs, spring clean your business and become more efficient.
As a business owner how have you planned for the living wage?