the advantages and DISADVANTAGES of the upcoming NLW increase

The UK Government has recently announced that the National Living Wage (NLW) will be increasing by 6.7%, raising wages to around £12.21 per hour, and is expected to be in place as off April 1st 2025. The change is set to impact over three million workers by enhancing their annual earnings up to £1,400 for full-time employees. Whilst this improvement in people’s wages is expected to improve the living standards as well as stimulate economic growth, it also presents a number of complex scenarios to be faced by many of the UK businesses, especially sectors that are heavily reliant on minimum wage labour.

Financial Implications for Businesses

One of the more immediate effects that will come with the NLW will be the rise in operational costs for many businesses employing low-wage workers. Industries in the sectors of retail, hospitality and leisure are the ones that are expected to feel the most significant impact due to their substantial minimum wage workforce. For instance, the British Beer and Pub Association reported that in 2024, over 289 pubs had closed and approximately 4,500 jobs were lost. It is now expected that with the upcoming wage increase as well as the general increase in costs around the UK, last year’s figures is expected to be double, if not tripled this year.

Additionally, it was reported the October 2024 Budget introduced and general rise in employer National Insurance contributions from 13.8% to 15%, this further increased the financial strain on businesses. The whole combination of higher wages and increased taxation has led to more concerns about profitability and sustainability, especially for the smaller to medium-sized businesses.

Potential Business Responses

To try mitigating these financial challenges as much as possible, businesses may need to consider these several strategies to combat the general rise in costs.

·      Price Adjustments: Passing on the increased labour costs to consumers through higher prices.

·      Workforce Restructuring: Reducing staff numbers or increasing reliance on temporary or flexible contracts.

·      Operational efficiency: Investing in automation procedures and streamlining processes to enhance productivity.

A recent survey that had been conducted had shown that while 54% of businesses believe a higher minimum wage could boost UK productivity, 22% might pass the cost to consumers, whilst another 15% could consider reducing their workforce.

Long-Term Considerations

Despite the immediate financial pressures, paying a real living wage can offer long-term benefits for businesses in cases like:

·      Improved staff retention

·      Enhanced Motivation

·      Better Employer Reputation

These are just a few examples of the potential advantages that can come with the increase to NLW for businesses, and over half of employers across the UK have reported that paying a real Living Wage has improved the quality of job applicants.

However, with the positive effects of the NLW increase there are also negatives that come with it as well. The cumulative effect of increased wages and higher taxes has led to a decline in general business confidence. A study conducted by the Chartered Institute of Personnel and Development reported that redundancy intentions are currently at their highest level since the COVID-19 pandemic, with nearly one-third of businesses planning to downsize to accommodate for the cost increases.

In Conclusion

The general increase in the National Living Wage reflects the government’s commitment to enhancing worker welfare, but whilst this policy benefits employees it also presents significant challenges for businesses, especially those in low-margin sectors. The challenge of balancing fair compensation with economic viability will require strategic planning, and potentially an increased amount of support from the government to help businesses navigate these upcoming dilemmas.