The Chancellor’s introduction of the National Living Wage could cost private sector employers more than £1bn, including £804m in direct costs, according to the Regulatory Policy Committee.
The independent body set up to scrutinise new government proposals stated today that private sector businesses could potentially pay out an additional £672m in wages and £132m in other associated costs, such as NI contributions.
A fit for purpose note highlights that employers could be further hit by a £234m in wage spill over costs – where employees wage rates close to the £7.20 mark are increased to maintain wage differentials.
The National Living Wage, which was announced during George Osborne’s first Conservative Budget in July. It will come into force in April 2016 at an initial rate of £7.20 per hour for those aged 25 and over, with the expectation that it will rise to over £9 per hour by 2020.
The RPC passed the government’s wage proposals as ‘fit for purpose’, but strongly criticised the government for refusing to assess the policy’s total cost to 2020. The government have so far refused to do this on the basis that it would undermine the independence of the Low Pay Commission (LPC), who is responsible for setting the minimum wage rates every year.
“The announcement of the Government’s 2020 target is, arguably, a much more significant constraint on the LPC than setting out an illustrative path of how to get there,” the RPC stated.
Government needs to ‘come good’ on promises
Reacting to the RPC’s findings the Institute of Directors (IoD) urged the government to “come good” on its promise of tax cuts for employers.
Seamus Nevin, the IoD’s head of employment and skills policy, said that the institute’s members had initially backed the Chancellor’s wage plan as part of a ‘deal with business’: Lower taxes for higher wages.
However, the institute is now worried that the Chancellor’s living wage is not the only extra cost businesses have been hit with.
“A new payroll tax, in the form of the apprenticeship levy,” said Nevin, “will cost employers £12bn over the course of the parliament, while the next tranche of pensions auto-enrolment will affect the very smallest businesses.
“This is not to mention a number of significant additional reporting requirements firms will have to comply with. The cumulative effect of these will be considerable, particularly for those medium-sized businesses that just meet the threshold for compliance.
“It is imperative that the government now comes good on its promise of less red tape, fewer regulatory hurdles and a lower rate of corporation tax to help employers absorb these additional costs and raise pay.”
Impact on small businesses
The RPC report also stated that the Department for Business, Innovation and Skills (BIS) had examined the impact of its NLW proposal on small and micro businesses: “The Department [BIS] recognises that small and micro businesses will be more than proportionately affected, with 16.2% of employees in micro firms and 9.7% in small firms being covered by the NLW, as compared with 5.8% in large firms.”
According to the RPC’s findings, BIS argues that any exemption to the NLW for small and micro business would create a “competitive distortion”, and create a “significant disincentive” for some small businesses to grow.
FSB: ‘fewer jobs; increased prices’
Responding to the NLW proposals, the Federation for Small Businesses (FSB) released a report in September which found that small firms were expecting to slow hiring and increase prices in response to National Living Wage.
“With the economy recovering it is right that employees should be rewarded with a pay rise – but we cannot allow wages to become a political football,” said John Allan, FSB national chairman.
“Over half of our members already pay their staff above the voluntary Living Wage, but those that don’t are often operating in highly competitive sectors with very tight margins.
“In many of these industries, the only sustainable way to deliver real long term wage growth is to improve productivity. Without improved productivity there is a real risk that higher enforced statutory wages will lead to fewer jobs being created, fewer hours for existing staff and, unfortunately in some cases, to job losses.”