National Minimum Wage (NMW) and National Living Wage (NLW) are set to increase by a record percentage increase from April 2023. Within this article we delve deeper into the impact of the NMW increase on SMEs, analysing key data statistics regarding labour costs within the industries that make most use of minimum wage pay scales, explore the effect the rise may have on these businesses, and experts from Price Bailey outline practical steps that your business can take to mitigate the adverse impact of the changes.
April 2023’s increase will see the biggest increase since the NMW was introduced, and whilst many employees and businesses alike favour the proposed increases to reflect the uplift in the cost of living, a double-edged sword has presented itself, causing some SMEs to oppose the rise under the belief that it is only a ‘benefit’ to businesses that can afford the rise. Paying an extra £1,600 a year for a full-time NMW worker (who is aged 23 or over) is a steep challenge, given the severe cost pressures already facing smaller businesses.
How much is the National Minimum Wage rising?
|Wage band||Current rate||New rate (from 1 April 2023)|
|Age 23 or over (National Living Wage)||£9.50||£10.42|
|Age 21 to 22||£9.18||£10.18|
|Age 18 to 20||£6.83||£7.49|
Workers under the age of 23 are eligible to the National Minimum Wage (NMW), which is the lowest hourly rate, if they fall under one of the following categories:
- full-time employee
- a part-time employee
- casual employee
- agency employee
- apprentice, in some instances.
Employers are required to pay employees aged 23 and above at least the National Living Wage.
Are wage costs increasing year-on-year for businesses?
The Low Pay Commission are responsible for monitoring the effects of the minimum wage across society. They estimate that 46% of all jobs paying at or below the NMW are situated within the retail and hospitality sectors. Other sectors under close observation, given the prevalence of minimum wage jobs, are manufacturing and the cleaning and maintenance sectors.
For the purposes of this article, we have looked at benchmarked performance data from the retail, hospitality, and manufacturing sectors in order to understand the impact of the rise in NMW on overall sector profitability.
Over the last 3 years, profit margins for manufacturing businesses have averaged around 7.3% across the sector. The average profit margin for the retail sector between 2020 and 2022 was 5.1%, and for the hospitality industry, it was 5.81%. When we set these small margins against the average proportion of costs for these businesses attributable to wages, the manufacturing sector between 2020 and 2022 was 14.73%, the average percentage of wage costs for the retail sector was 8.9% for three years to 2022, and for the hospitality sector this was 31.42%, we can see the very real impact that a rise in the NMW and NLW will have for these businesses.
The direct increase in National Minimum Wage costs for many businesses will impact their bottom line profitability at a time when these margins are already being squeezed. In an environment where price increases to customers may not be the best strategy, we look to what businesses are doing to actively tackle these issues and what business owners should be thinking about ahead of the NMW increase in April 2023.
How are businesses responding to NMW increases?
An employee’s market?
For a large proportion of businesses that employ people on the NMW, this is usually the case because the business model is such that there is often not the capacity to pay staff anymore.
For those workers whom your business undoubtedly needs, as of 2022 there was greater choice between jobs offering NMW and NLW, particularly in heavily-saturated areas such as London, resulting in an employees’ market for these job roles. This meant that many SMEs in the retail, manufacturing and hospitality sectors were having to offer NLW in order to remain competitive.
However, despite 11,000 businesses accredited with the Living Wage Foundation, the number of jobs paying below the NLW in 2023 is expected to increase from 3.5million to 5.1million as wages continue to fall behind inflation and the severe cost-pressures facing businesses continues to increase.
The availability of labour
Since the end of the UK’s transition out of the EU, the introduction of the new points-based immigration system is seemingly shrinking the UK labour pool. The system has induced mass-worker shortages in sectors where there was greater reliance on EU migrant staff. Many believe that the system is discouraging for young people, and that the UK will miss out on fresh talent due to the strict criteria.
It is thought that there were around 3.4 million EU citizens living in the UK in 2020, most of whom were said to be ‘unskilled’ or ‘low-skilled’ workers. For those that support the points-based immigration system, it is seen as an opportunity for employers to become less reliant on the old UK’s immigration system as an alternative to investment in staff retention, productivity, and wider investment in technology and automation.
The biggest increase in the NMW and NLW rates yet, perhaps means that many businesses will favour investing in technology and part-time workers. Companies, particularly those in the retail and hospitality sectors, are focusing on and investing in effective online platforms to increase internet sales. If e-commerce sales increase, then it is likely that fewer staff will be required on the shop floor whilst higher-skilled workers e.g., website designers and editorial content creators, will be in higher demand as businesses shift their priorities. However, it is almost certain that SMEs will be spending a higher proportion of their revenue on wages compared to larger companies which are more likely to afford the latest advanced machinery to optimise their operations and therefore reduce their labour requirements.
There are practical steps that businesses can take to counter the potentially adverse impacts of NMW increases. As Simon Blake, SCF Partner and member of Price Bailey’s Executive Board, shares in more detail, scenario planning is key in these moments.
Many businesses are cautious about increasing their prices in the current economic environment. However, it is important for business owners and managers to understand that they should not be fearful of price increases in the current climate as most of us, as consumers, are anticipating price increases anyway. If business owners choose not to do this, then to counteract this by improving operating efficiencies within the business will also potentially allow for a reduction in costs. It is currently an easy environment to increase prices as the majority of people are expecting it.
Businesses with upwards of 250 employees operating within the hospitality sector often illustrate the above scenario. 54% of these businesses are passing on a small price increase to consumers (if any at all) and now, being faced with a 10% increase in NMW costs in addition to escalating food costs, it is a hard pill to swallow and not one that business owners can do nothing about. In situations such as this, businesses may consider reducing the hours of their staff, for example, in restaurant and catering businesses, they may reduce operating hours, or reduce the number of menu options available in order to mitigate the wage expense.
Many NMW earners are living hand to mouth, so it is important for your business to consider when it pays its staff. Your business should be paying the payroll for your staff within the month. However, if an outsourced provider pays you to complete a service, they may pay you from an invoice raised after the end of the month, which is payable within 30 to 60 days. Bearing in mind the cash flow of your business, you might wish to consider changing your contract with an outsourced provider to pay some, or all, of the cost upfront.
Ahead of the increase in April, business owners should also be taking the time to identify any loss-making areas of the business, and asking themselves why they are investing in these areas. Sometimes, there can be a positive reason for a business to invest in a loss-making area of the business, however, it is important for business owners and managers to understand the granular data to identify these and ensure the quality of higher level decisions.
When modelling for the future, business owners need to be aware the reverse inflation may happen in 2024, and therefore need to be asking themselves what costs may go down (or will not increase) in the future, despite them being high now. This is where scenario planning is of vital importance .
The UK is currently experiencing more in-sourcing of manufacturing due to China’s economic downturn. However, the UK manufacturing sector may be feeling nervous about the current price of energy. Moving forwards, manufacturing companies may begin investing heavily in energy planning for the future by moving energy usage away from peak times or investigating investment in solar as it becomes more affordable than ever and brings with it substantial tax-saving incentives.
Summary of thoughts
The upcoming NMW increases create both a very real, short-term challenge for many business owners in the sectors we focus on here. However, it also is another indication (alongside increases in energy prices and other input costs to businesses) that business owners should use now as the opportunity to properly consider the business models and investment plans that put them in a longer-term stable position, rather than knee jerk responses to external fluctuations.
Moving forward, many smaller businesses may see an overall decline in their labour costs as they choose to focus on investing in technology, and transfer staff to part-time contracts. This has very real consequences for the individuals who themselves are at the painful end of the cost of living crisis. Alternatively, many SMEs will and perhaps should consider passing on the cost increase to their consumers, as now is likely the best time to be able to successfully do this.
If you have any questions regarding how the National Minimum Wage increase will impact your business and the best way to prepare for further cost increases, you can contact Simon Blake or Claire Berry using the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.
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