Minimum wage rise adds to struggling business burdensby
The minimum wage is going up from April but could prove a double-edged sword for the economy as a growing number of businesses stare at insolvency.
The largest-ever rise in the minimum wage is good news for workers but could push huge numbers of strained businesses into bankruptcy, experts have warned.
On 1 April 2023, the government will increase the National Living Wage (NLW) rate for workers aged 23 years and over by 9.7% to £10.42. Other groups, including those under 18 and apprentices, also see their hourly take-home pay jump.
Against the backdrop of a tight labour market and a struggle to fill roles, the government approved the raise last November to help businesses recruit and retain staff, and to support workers with rising bills and prices.
While welcomed by living wage charities, the rise is “a double-edged sword” due to its timing, experts said. The number of jobs paying below the NLW in 2023 is expected to increase from 3.5m to 5.1m as wages continue to lag behind inflation and businesses continue to endure problems sourcing goods and paying their own bills.
“Paying an extra £1,600 a year for a full-time national minimum wage worker is a steep challenge, given the severe cost pressures already facing smaller businesses,” said Simon Blake, partner at Price Bailey chartered accountants. “For a large proportion of businesses that employ people on the minimum wage, this is usually the case because the business model is such that there is often not the capacity to pay staff anymore.”
UK insolvencies have hit a 13-year high, with restructuring advisors predicting the long-term upward trend will continue as households rein in spending, meaning April’s rise has come at the worst time for many firms.
“Leaders of struggling businesses will need to closely monitor and improve cash generation to survive,” said Simon Monks, restructuring and insolvency director at Azets.
Hospitality businesses will be disproportionately affected by the NLW increase, said Alan Broome of Acumenica Tax and Accounting.
“The cost of hiring is about to go up, which on top of everything else makes food and drink a tough game to be in right now,” said Ben Steele, managing director at Steele Financial Ltd, which serves a number of hospitality businesses in the southwest. “Above all, check your wage costs,” added Steele.
Payroll costs for pubs, bars and restaurants dwarf other sectors, with research showing hospitality businesses pay almost four times the amount retailers do on staff.
There is often a misconception that compliance with the regulations is as simple as paying the correct rate per hour, said Stephen Greenaway, business tax expert at Evelyn Partners advisors.
“A further misconception is that employers that pay above minimum wage do not need to concern themselves with the details of compliance with the regulations as they are ‘safe’ due to the level of pay,” he said. “These are misconceptions that expose employers to risk as there are a number of pitfalls that can catch out even the most conscientious employers and those who set out to pay their employees more than the legal minimums.”
HMRC will be stepping up enforcement of low pay, and the dangers of being caught out following an inspection can be brutal, said minimum wage expert and founder of Fair Pay Hub, Katy Hampton.
Hampton shared a note on social media regarding a nursery that was forced to close due to a “technical misunderstanding” following an HMRC minimum wage visit.
The visit from the tax authority resulted in “immediately laying off the entire workforce and forcing parents to find a new nursery to care for their children,” Hampton said.
“This issue arose as the employer (and accountant) were unaware of the NMW impact when deducting childcare fees from workers’ pay,” Hampton said.
HMRC can hit businesses with penalties of 200% for making a mistake, she said.
“I cannot emphasise enough how crucial it is to always engage a minimum wage and HMRC enforcement expert when dealing with an inspection to ensure that every avenue has been explored before settling disputes,” Hampton said. “Especially, when such serious and devastating consequences are at stake.”
Hunting for efficiencies
There are practical steps to offset the potentially negative impact of the NLW increase, accounting experts said, including the identification of loss-making areas and a revision of business plans.
Entrepreneurs must look for efficiencies and consider where cost savings can be made right across their organisation, said Claire Berry, employment solicitor at Price Bailey.
“This could lead to businesses reassessing roles and restructuring teams and/or outsourcing central functions such as marketing or payroll,” she said. “This, alongside increased automation may result in redundancies or businesses offering staff reduced hours. Where gaps in the workforce are identified, it may be that businesses opt for part-time employees or casual workers, to reduce costs.”
Where firms do take on casual workers, Berry said it is important that they are truly casual workers to ensure that there are no arguments over their legal status as employees, as this will carry financial consequences.
“Business owners also need to be willing to accept that they will have to absorb some of the pain in the short-term too,” she said. “Owners should consider not taking bonuses of profits out of the business at the same time as not being able to offer their staff pay rises”.