Rise in national living wage affects small businesses

7th August 2017

Increases to the national living wage (NLW) have increased the pressure on small businesses, with two-thirds seeing lower profits and almost half putting up prices to meet the costs.

The findings come from a survey carried out by the Federation of Small Businesses (FSB), which is calling for further rises to be delayed if businesses continue to struggle.

Nearly 40% of small businesses affected by the NLW have put up prices to cope with the latest increase to £7.50 per hour. A further quarter have cancelled or scaled down investment plans. A fifth have reduced staff hours or hired fewer workers.

The FSB research also suggests that the expected surge in the recruitment of younger employees (who would be on a lower pay rate) has not happened. In fact, less than 4% of small businesses responded to the NLW increase by hiring more workers under the age of 25.

The FSB said the hardest hit are care, retail and hospitality businesses due to the tighter margins and high proportion of staff on the national living wage.

The group is urging the Low Pay Commission to consider if the Government’s target of raising the NLW to £8.75 an hour by 2020 may need to be delayed.

FSB National Chairman, Mike Cherry, said: "Small employers have demonstrated their resilience in meeting the challenge set by the National Living Wage, with many cutting their margins, or even paying themselves less, to pay their staff more.

"In sectors where margins are tight, small firms are resorting to more drastic measures to cope with the NLW. It's vital that the NLW is set at a level that the economy can afford, without job losses or harming job creation.

"Cost pressures on small businesses are building, and with most recent economic indicators underperforming, we are now facing the reality that the NLW target may need to be delayed beyond 2020.”

The research showed that 64% of those companies reporting an impact from higher NLW levels had ‘stretched’ to meet this year's increase by taking lower profits - damaging investment. 39% had raised their prices, adding to the inflationary environment.

Business operating costs have surged to their highest in four years, according to FSB’s latest Small Business Index, with the 43% of businesses who have had to raise wages experiencing ‘significant pressures’.

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