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Minimum wage rise adds to struggling business burdens

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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.

22nd Feb 2023
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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.

Devastating consequences

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”.

Replies (11)

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the sea otter
By memyself-eye
22nd Feb 2023 17:54

It's not just the minimum wage is it?
That comes on top of pension contributions, holiday pay, sick pay, maternity and paternity leave (depending on which gender assignment is in vogue this week) WFM, WFO (I made that one up) WTF (I didn't make that one up) and any number of myriad costs heaped upon businesses.
Soon everyone will have the minimum wage - and more, just no one will be around to pay it!

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By Duggimon
23rd Feb 2023 09:23

Working full time on the minimum wage does not provide enough income for a single person living alone to live on in vast swathes of the country.

Inflation is at ten percent, so businesses should be increasing prices by ten percent, so they should increase wages by ten percent. It's not a complicated sum.

If your customers won't or can't pay more then you either need new customers or your business has ceased to be viable, that's capitalism baby, if you don't like it then join me and we'll fight for a new system, I'm all for that.

However, let's not pretend that, the focus of this article aside, the vast vast vast majority of minimum wage jobs are for gigantic plcs who make profits in the billions, and who will nevertheless increase prices to entirely absorb this hike.

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Replying to Duggimon:
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By DAVESTACE
23rd Feb 2023 10:01

SPOT ON!! Cant believe this article was allowed to be published.

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Replying to Duggimon:
the sea otter
By memyself-eye
23rd Feb 2023 18:13

well said comrade.

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By moneymanager
23rd Feb 2023 10:19

It's another expression of crushing working capital and the entepreneuiral middle classes, Klaus Scwab wasn't joking when he said "You will own nothing but you will be happy", there are too many expessions of self inflicted financial pain to be an accident, wea re seeing very real, real world harms , starting to emenate from the mass proliferation of LTNs/15 or 20 min cities, or whatever they are called, tradespeople refusing to enter city centres because they can't get out, others who work cross city centres are having to raise prices because it takes an hour to do a ten minute journey, doctors who can;t get to hospitals when on call, this madness must not only stopped but reversed.

"Once is happenstance. Twice is coincidence. Three times is enemy action."

Goldfinger - Ian Fleming

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By Krusty
23rd Feb 2023 10:20

If a business can't afford to pay the MINIMUM wage then it is not viable and should be dissolved.

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By AndrewV12
23rd Feb 2023 10:29

The minimum wage is going up from April

Everything is going bloody up in April.

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By AndrewV12
23rd Feb 2023 10:32

'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.'

Hows about stripping out layers of hopeless managers for start.

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By tedbuck
23rd Feb 2023 11:46

There's a great deal to be said for both sides of this argument but the reality is that many businesses just cannot afford a large hike in salary rates. Result will be increase in prices - otherwise known as inflation, so a reduction in the amount people have to spend in the suffering businesses, so jobs will be lost - the state will have further increased support costs and you will have something called a wage/price spiral which leads to higher inflation and reduced employment and higher taxes to pay for the unemployment support.
Increasing the NMW is all very well and necessary but it will kill the pub and restaurant trade where the margins and costs just won't sustain a large wages cost increase. Still I suppose that those who can afford to booze and scoff will save money by doing it at home once all the pubs have closed. Perhaps that's what the Government are trying to do - make us all into WFH homebodies who don't go out and pollute with our travel because we live in our burrows like good little rats.
O Brave New World..........

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Replying to tedbuck:
By Duggimon
23rd Feb 2023 14:50

Inflation has already happened, the prices already went up and now minimum wage earners can't afford what they used to be able to, this is them catching up with prices, not driving prices further.

If businesses haven't put their prices up and can't afford the wages then your business isn't viable. If you can't increase prices in line with inflation, or find a way to increase efficiency, you're done.

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boxfile
By spilly
23rd Feb 2023 13:32

The hospitality trade is already looking at employee ages when hiring - cheaper to have a 19 than a 25-year old.
If this extends to the rest of the workforce, the push to get the over-50s back into employment is doomed.

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