Businesses Encouraged to Prepare for the Introduction of the National Living Wage

With the introduction of the National Living Wage on the 1 April, businesses are being encouraged to take steps to ensure they are ready to support the changes. The National Living Wage (NLW) will become law in April 2016.

The NLW scheme will see all over 25 year olds be paid £7.20/hour, as the government looks to move closer to a higher wage, lower welfare society. The government hopes this scheme will build a more productive Britain and give families the security of well-paid work.

A survey conducted for the Department of Business, Innovation and Skills (BIS) found that 93% of directors were in support of the initiative, with many believing that it will boost productivity and staff retention.

Businesses are advised to begin preparations ahead of April 2016. The BIS encourages businesses to make sure the following steps are made:

– Know the correct rate of pay – £7.20/hour for staff aged 25 years and older*

– Find out which staff are eligible for the new rate

– Update the company payroll in time for 1 April 2016

– Communicate the changes to staff as soon as possible

This advice comes alongside the results of a poll showing that 93% of bosses agree the new wage is a good idea, 88% believe it will lead to higher productivity and 83% say it will make staff more loyal to their firm. Business Minister, Nick Boles, has said that “the government’s new National Living Wage will provide a direct boost to over two-and-a-half million workers in the UK”.

Despite the popular support for the measure, the poll revealed that many firms were yet to take any key steps; around only 45% had updated the payroll and only 39% had communicated changes.

The Regulatory Policy Committee (RPC) has since warned that this could cost businesses approximately £1.1billion.

The impact of the proposal is likely to be considerable; the overall costs can be broken down into direct (£700m), indirect (137.5m), and transition (£22.6m) costs. This comes atop of additional costs to businesses; including the payroll tax and the apprenticeship levy, auto-enrolment changes and implementation for small businesses, and the changes to the reporting requirements. The cumulative effect will undoubtedly be considerable.

Approximately 1.7m employees will be affected which in monetary terms will be approximately £804.4m; with £672m in wages and £132.4m in non-wage labour costs. This increase in wages will also require the wages of other employees to be raised to maintain the wage differentials. The ‘ripple effect’ is expected to cost approximately £243.3m.

Atop of this, businesses will have to prepare for the transition costs which includes the time taken for directors and managers to familiarise themselves with the changes as well as the time to update the payroll of employees. The RPC has anticipated this will cost around £22.6m.

The RPC has recommended businesses to prepare by providing an economic appraisal of the full policy ambition. They suggest best practice is to assess the impact of the first year following the regulatory change to ensure the situation and investments are successfully managed.

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