More than half of small firms paying all staff at least £8.21 an hour before this became the National Living Wage (NLW) rate in April
Business owners paying themselves less, increasing prices, holding back investment and reducing staff hours in response to rising pay
Federation of Small Businesses (FSB) warns against “arbitrary political targets” for wages, urges caution from the Low Pay Commission (LPC) and calls for higher apprenticeship wage
Ahead of today’s labour market update, new FSB research reveals that small business owners are cutting profits and productivity-enhancing investments in an attempt to absorb inflation-beating wage increases.
Its new survey of more than 1,000 business owners shows that over half (51%) of small firms were paying all staff at least £8.21 per hour prior to this becoming the NLW rate in April. The figure rises to 56% among microbusinesses (those employing up to 10 staff).
The new research shows that the most common response to April’s NLW increase among small business owners directly affected by the change is to pay themselves less: seven in ten (71%) lowered profits or absorbed costs in an attempt to handle the hike. The other most-frequently cited responses are: increasing prices (45%), delaying investment (29%) and reducing hours worked by staff (23%).
April’s NLW increase coincided with the roll-out of fresh HMRC reporting requirements, higher employer pension contributions and increases to business rates. Previous FSB research shows that the cost of government policy interventions to the average small firm is up £60,000 since 2011.
The fresh findings are included in FSB’s response to the LPC’s current consultation on minimum wage rates, in which the UK’s largest business group stresses that “it is crucial for the LPC to maintain a firm level of independence – the NLW shouldn’t be dictated by arbitrary political targets.”
Elsewhere, FSB calls on the LPC to take “a cautious approach in working towards an aspirational goal”, encouraging policymakers to “implement any future ambitious pay goal over a ten-year period.”
It also highlights that “significant changes to minimum wage levels alone will not achieve the goal of reducing poverty in the UK… Universal Credit, affordable housing, education, childcare and accessible transport all have a vital role to play.”
FSB National Chairman Mike Cherry said: “Small businesses continue to be ahead of the curve on pay. More than half were paying all staff the current National Living Wage before they were obliged to do so – an even greater proportion were doing so in the smallest firms.
“We’re now seeing more small business owners than ever saying that living wage increases are impacting the bottom line. Their first instinct is usually to take the hit personally, paying themselves less rather than cutting staff.
“While politicians are locked in a battle of who can make the boldest promises on pay, they fail to acknowledge that – within many smaller businesses – bigger pay packets often mean less investment, fewer training opportunities and higher prices. With pay now outstripping inflation, it’s harder and harder for small business owners to put funds aside for the investment needed to close the UK’s productivity gap.
“Policymakers off all stripes need to recognise that higher minimum wage rates are not a silver bullet. Ending poverty means taking action on various fronts, not simply burdening smaller businesses with more costs. Future increases to wage rates should be determined by an independent Low Pay Commission basing recommendations on economic realities, not inflexible targets.
“Against a backdrop of persistent political uncertainty, greater support is needed to help small firms absorb spiralling employment costs. As part of an Emergency Brexit Budget, this Government should uprate the £3,000 Employment Allowance and deliver its manifesto commitment to a national insurance holiday for small businesses that take-on those furthest from the labour market.”
The research also reveals small business readiness to extend the NLW rate to younger workers. Close to two-thirds (60%) typically pay 21-24 year olds at least £8.21 an hour, considerably above the £7.70 minimum wage rate for this age group. Previous FSB research shows that well over half (58%) of smaller firms employ a worker aged 16-24.
As part of its consultation response, FSB recommends “gradually bringing the apprenticeship rate more closely in line with the under 18 rate”, while cautioning that “extra care must be taken to ensure the level set does not adversely affect take-up of apprenticeships”. Apprenticeship starts have tumbled in recent years.
Mike Cherry added: “There’s a conversation to be had about increasing pay for younger workers – especially those just below the National Living Wage threshold, and those entering the workplace straight from school. That said, the greater experience and expertise usually held by older employees must continue to be recognised. Any changes should be gradual and carefully monitored, especially in such an uncertain climate.”