Small businesses are predicting that policy reforms will have a damaging effect on them, research by the Federation of Small Businesses shows.

Tight Profit Margins

The survey of 1,261 FSB members found that 38% of small employers fear that the new national living wage of £7.20 an hour will have a negative effect on their business when it comes into force in April 2016. The figure rose to 54% when respondents were asked about the longer-term prospect of the National Living Wage rising to £9 per hour by 2020.

“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,” said John Allan, the FSB chairman. “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 and, unfortunately in some cases, to job losses.”

Just 6% of the employers surveyed believed the new Living Wage would have a positive effect on their business.

Cutting Their Cloth

The FSB survey also asked businesses how they intended to cope with the change when the new National Living Wage comes into effect.

• Staffing: 52% said they would delay hiring new staff, 31% will cut existing staff, 41% will reduce staff hours and 26% would freeze pay or cut the wages of higher paid staff
• Prices & Profits: 50% said they would have to increase their prices and 29% planned to absorb costs through reduced profits.
• Investing: 29% said they would cancel or postpone planned investments.

The FSB’s latest Cost of Employment Index, a comprehensive model of wage and non-wage costs for small businesses across a range of sectors, estimates that the extra cost of paying the National Living Wage to six full time staff aged 25 or over and earning the current adult minimum wage will be £5,900 a year from April 2016. Auto-enrolment pensions will also put extra financial stress on small businesses.

The FSB is warning that it’s likely these factors may be contributing to a dip in small business confidence shown in their research.
John Allan said: “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. It’s important that the independent Low Pay Commission continues to play a central role in setting the minimum wage, and that includes deviating from the Government’s plan to raise the National Living Wage to over £9 an hour by 2020, if it becomes apparent that the economy cannot afford it.”

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Karl Bilby

We work very closely with our expert accountants to bring you the latest factually correct tax and accounting news. We also enjoy writing about small business news that we hope you find useful!

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