How the National Living Wage increase could affect businesses

At the latest Conservative Party conference, it was confirmed that the National Living Wage will be officially rising to £11 an hour for those over the age of 23, starting from April 2024.

This increase of 58 pence means that those on the National Living Wage who work full time could receive an annual increase of £1,000.

Whilst this is a positive thing for employees, businesses may find it causes different financial strains, and so need to consider different ways they can subsidise this increase in wages.

The financial strain on businesses

Operating costs

One of the most immediate impacts is the rise in operating costs.

For businesses, particularly small and medium-sized enterprises (SMEs), this wage increase can strain budgets, causing a knock-on effect on several aspects of operations, such as inventory and overheads.

Profit margins

Higher wages lower profit margins unless counterbalanced by an increase in prices, productivity, or both.

In sectors like retail and hospitality, where profit margins are generally already thin, the increase in wages can be particularly difficult.

The effects of the increase in wage

• Employee benefits: Companies that previously offered benefits like bonuses, free meals, or staff discounts could decide to reconsider these extras as they balance the financial load of the higher National Living Wage.
• Price adjustments: To maintain profit margins, some businesses may also resort to rising prices.
• Productivity improvements: Higher wages can create greater productivity, as employees who feel fairly compensated may be more motivated and engaged in their roles, which can lead to a more efficient and effective workforce.
• Consumer spending: Higher wages also means there is more disposable income around, which could increase consumer spending. Businesses, particularly those in the consumer goods or services sectors, could benefit from this surge in demand.

The rising National Living Wage in the UK is a double-edged sword for businesses; whilst there are immediate financial pressures, there are also potential long-term benefits such as improved productivity and increased consumer spending.

Businesses will need to adapt strategically, optimising operations and possibly re-evaluating business models to navigate these new changes successfully.

If you would like advice about adapting your business plans to adjust to the National Living Wage increase, please get in touch today.