11th April 2016
With the National Living Wage being introduced from April, companies are having to get to grips with what it will mean for them. This means ensuring your payroll and HR systems can cope with all the necessary changes to pay.
Here we look at how the National Living Wage will work and what its impact is likely to be on employment over the next few years.
Complying with the National Living Wage
From April 2016, the new National Living Wage is being introduced across the UK. Under the new rules, the statutory minimum wage level for most people aged 25 and above will go up to £7.20 per hour. There will then be further annual rises, taking the hourly rate to £9 by 2020.
Companies will have to pay at least the new rate to both their own employees and agency workers. There are some exceptions, such as people who are self-employed and those in the first year of an apprenticeship, but in general businesses will have to factor in the costs of higher wages for all over-25s.
Although under-25s do not have to receive the National Living Wage, they will still need to receive the National Minimum Wage for their age group. This is currently set at £6.70 for workers aged 21 and over, with lower rates for younger workers.
NLW is completely separate from the Living Wage, a rate calculated by the independent Living Wage Foundation and based on the cost of living. This is a higher wage rate which employers can choose to pay on a voluntary basis, currently £8.25 per hour outside London and £9.40 within London.
Impacts for Business
There has been a mixed reaction so far from businesses to the rolling out of NLW. One recent survey of UK entrepreneurs found some cautious optimism. However, there has been some trepidation in some areas of business, particularly in the retail sector.
In the survey of business owners, around a third of respondents predicted the new pay rate would help their business, while only 15 per cent said it would have a negative effect. Uncertainty was the overall mood, however, with more than half those who took part saying they were not sure whether there would be more positive or negative effects.
Positive Factors: One of the main advantages expected to result from higher wages is improved staff morale, which is also likely to lead to greater productivity. In research by the Government, 59 per cent of workers responding said they would be more motivated because of the wage increase.
Some individual workers have been quoted in Government publicity saying the higher income will make a difference to them, including school cleaner Michelle Curley, who appeared in a TV ad. She said the rise would help with her shopping bills.
The rolling out of the National Living Wage could also help to build company reputations, since paying staff higher wages is a factor which tends to encourage clients to use a particular company. It is also likely to make it easier to recruit people if they are being paid a higher amount.
Negative Factors: Fears have been voiced that forcing employers to pay higher wages will accelerate job losses in the retail sector, which is already struggling to combat online competitors. The British Retail Consortium has warned that increased wage bills could contribute to 900,000 jobs being lost across Britain. It fears that more than 25 per cent of shops will close in the next ten years and says less prosperous areas could be hardest hit.
There is also concern over the impact on the social care sector, with the UK Homecare Association saying some services may become “unviable” unless there is more investment to meet the extra costs.
Adding to the costs of employment could also make companies more reluctant to take on new members of staff, especially as the National Living Wage comes on top of other costs such as pensions auto-enrolment.
Many businesses say that increased wage bills could mean they have to cut back in other areas of spending. There may also be rethinks over employee benefits and reward packages, as well as less availability of overtime.
Readying Your Payroll and HR Systems
The onus is on companies to ensure that they comply with the new National Living Wage rules. Employers who fail to do so risk being “named and shamed”, and could also have to pay a maximum financial penalty of 200% of arrears, up to a maximum of £20,000 per employee. Anyone who deliberately breaks the rules could also face prosecution and, if found guilty, could be disqualified from being a company director for up to 15 years.
As well as ensuring staff are being paid the right amount now, you also need to ensure that you know when someone needs to go on to NLW, for instance if they pass their 25th birthday. You also need to be ready to make other changes when the rates change in the future.
All IRIS FMP’s payroll and HR systems make it simple to adjust the pay rates of individuals. For instance, you can set-up email alerts to advise when these milestones are due or coming up. Payrite and Teamspirit are both fully HMRC recognised and enable RTI reporting.
Payroll and HR Systems – Click to contact IRIS FMP HR and find out more about our services.