What the new Living Wage means for SMEs

Posted on Jul 29th, 2015 | Employment law

With the surprise announcement in the Summer Budget that the Conservative government will introduce a compulsory “National Living Wage” from 2016, we thought we’d look at what this means for SMEs.

[Updated 2018]

What is the situation now?

  • Currently in the UK, anyone who’s defined as a “worker” (including employees and Agency Workers) is entitled to the National minimum wage (NMW), and workers don’t need a written contract to be eligible for it.

The current situation regarding the Living Wage is this:

  • The concept of a living wage (as opposed to a minimum wage, which isn’t relative to how much it costs to live where you work) was taken up around a decade ago
  • It’s currently a voluntary pay rate that employers can pay their staff, and it’s set at £10.20 per hour in London and £8.75 outside London (from 3rd November 2017)
  • The Living Wage Campaign has called for every worker in the UK to earn enough to provide their family with the essentials of life
  • The current London Living Wage is calculated by the Greater London Authority.

What will the new Living Wage mean?

  • This will be a ‘premium’ on top of the existing national minimum wage, for workers aged 25 and over, and employers must pay this
  • The National Minimum Wage is £7.20 in April 2016, increasing to £7.38 on 9th April 2018 and predicted to rise, in increments, to £9 per hour by 2020
  • The Low Pay Commission (LPC), an independent body which currently makes annual recommendations regarding the rate of the National Minimum Wage, will also suggest rates of the level of the new premium.
  • It’s expected that legislation will be published to say that workers can’t be dismissed or subject to a ‘detriment’ because they ‘will or might qualify’ for the National Living Wage (which currently exists for the NMW).

What impact will this have on Employers?

The Government claim this will have a neutral impact on employers because of other tax and welfare adjustments they announced in the budget.

However, many have concerns that this will have an adverse effect upon jobs, especially combined with the new financial burden for many SME’s of implementing pension auto-enrolment in 2016 / 17 (if they’re not affected before).

Non-compliance with the new National Living Wage will be a criminal offence with a financial penalty. The Government have also announced that anyone found guilty of this offence will be considered for disqualification from being a Company Director for up to 15 years. The enforcement regime for the the new National Living Wage is the same as for the National Minimum Wage which you can see here.

The Office for Budget Responsibility (OBR) says the new living wage would have only a “fractional” effect on jobs – by 2020 there would be 60,000 fewer jobs as a result of it; but almost one million new jobs formed. The OBR estimate that the cost to business will amount to 1% of profits.

John Cridland, Director-General of the CBI, said:

“Firms will welcome measures to balance the books and boost investment, but they will be concerned by legislating for wage increases they may not be able to deliver.

“The CBI supports a higher skilled, higher wage economy, but legislating for a living wage does not reflect businesses’ ability to pay. This is taking a big gamble that the labour market can absorb year-on-year increases of an average of 6%.”

Other commentators have expressed their hope that a higher wage would bring with it lower sickness absence figures and a more engaged workforce with increased productivity. The Government also announced a ‘plan for productivity’ led by a consortium of British businesses.

The Chief Economist at the CIPD said that while the OBR claims the national living wage will have little net effect on employment, their forecasts rely on assumptions about future productivity growth that have proved wrong to date.

“This policy will only deliver higher pay without significant job losses if it is accompanied by a drive to increase productivity in low pay sectors such as retail, hairdressing, hospitality and the care sector – and that will need more than delivery of apprenticeship numbers or employment subsidies via the national insurance contributions system.”

Since the announcement, Councils in England and Wales have warned the national living wage could cost them an extra £1 billion a year by 2020.

The Local Government Association has said about 93,000 council staff currently earn less than the £7.20 an hour which could cost Councils in England and Wales an extra £1 billion a year by 2020. It also said social care contracts would have to be renegotiated, adding an estimated £330 million to its bills, as about 60% of their budget is spent on staffing. Although 95% of the local government workforce already earns more than £7.20 an hour, it’s analysis suggests there are 92,820 (mostly part-time) council employees earning less, including street cleaners, school crossing patrol workers and school dinner staff.

And yet, other commentators have said the move is a step in the right direction, but it should cover those aged under 25 and should be at the level of the current Living Wage (outside London £7.85, inside London £9.15).

There are also concerns about bringing another level of complexity to the employment relationship because there’ll soon be:

  • The National Minimum Wage
  • The current living wage
  • The new living wage, and
  • The London living wage


It sounds like age discrimination to pay workers different amounts depending on their age, but the Equality Act 2010 allows employers to pay a young worker less than an older worker, in reference to the NMW; so this exception will need to be expanded to include the new National Living Wage.

If you are an Employer and need ongoing professional help with any staff/freelance issues then talk to Lesley at The HR Kiosk – a Human Resources Consultancy for small businesses – our fees are low to reflect the pressures on small businesses and you can hire us for as much time as you need.

Please note that the advice given on this website and by our Advisors is guidance only and cannot be taken as an authoritative or current interpretation of the law. It can also not be seen as specific advice for individual cases. Please also note that there are differences in legislation in Northern Ireland.

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