From April 2024, employees over 21 will be entitled to a National Living Wage (NLW) of £11.44 an hour.

Although many businesses already pay their staff members the National Living Wage, some are expecting many challenges.

Over a quarter (26 per cent) of retailers said the increase would lead to them hiring fewer people than they ideally would, while 33 per cent would need to increase their prices to accommodate the rise, according to a survey by Employment Hero.

Increased overheads are likely to put pressure on some employers, squeezing cash flow and affecting growth.

So how should SMEs deal with these challenges? Hopefully, businesses have already looked at the impact this is going to have and how they will deal with the new wage rate. Whether you have or not, this new legislation isn’t going to go away and you can’t ignore it.

How should you prepare for the Living Wage?

With new rate of £11.44 applying to employees aged 21 and over, the first thing you will need to do is to check how many people in your workforce are already 21 or more and how many will soon be celebrating their 21st birthday.

The new rate is payable from April 1 and there are penalties for non-payment, so you need to make sure you have everyone on the correct rate.

One type of employee to look carefully at is your apprentices, if you have any. As with the National Minimum Wage, The National Living Wage won’t apply to apprentices under 19- years-old in their first year of apprenticeship, but it will come into effect at the beginning of their second year.

Your payroll department, or your payroll provider if you outsource this, will need to have a system in place that flags up the employee’s 21st birthday in order to pay the correct rate.

You probably already have such a system in place for the other age milestones i.e. 18-20, 21, and 19 for apprentices. If this is the case, you will just need to set up another one for 25.

Don’t forget about the following areas…

1. Do you have casual workers who come in to help out when needed?

These casual workers will also be entitled to be paid the National Living Wage if they are 25 or over.

2. Do your employees/workers get tips or gratuities?

Don’t forget that tips, gratuities and service charges don’t count towards the National Minimum Wage or the National Living Wage, whether they are mandatory and paid through the payroll or whether they are given at the discretion of the service user.

How are you going to deal with the increase in your wage bill?

There are several ways in which you may decide to deal with the increase. You could:

• Stop bonus payments and cut down on overtime
• Increase productivity by streamlining your processes to increase efficiency; have clear job descriptions, set targets, implement training etc
• Reduce the number of hours employees work; this will save money but is likely to reduce productivity
• Reduce the number of employees by not replacing people who leave or by redundancies; your remaining employees will absorb the work
• Employ younger workers; cheaper wage bill but less experience
• Pass the additional costs on to your customers
• Absorb the increased costs and cut your profit

What are others doing?

It might be wise to do a little research in your industry or local area. Here are some areas to consider:

• Are your pay rates competitive at the minute? If so, will the new rates take this away?
• Consider the impact of the new rates against the vast cost of recruitment and training especially if your employees are used to being paid ‘above the minimum’
• Look closely at your costs and budgets and see if you can manage the increase in the crucial areas if you can cut down elsewhere
• If your pay differentials compared to other companies are eroded and you want to retain your experienced employees and recruit good people, as an alternative, you could look at other benefits which wouldn’t cost you anything such as flexible working
• Could you negotiate discounts for your employees at other local companies such as travel agents, café/restaurants, leisure centres/gym, hair salons or nurseries to give you your competitive edge back?

Be aware of the penalties

As with the National Minimum Wage, penalties will be imposed for not paying the National Living Wage:

• Issuing a notice to pay the money owed, going back a maximum of six years
• Maximum of £20,000 fine per employee who has been underpaid
• Legal action, including criminal proceedings
• Passing on the names of employers to the Department for Business and Trade, who could put them on a list

In addition, it will be automatically unfair to dismiss someone aged 21 or over to avoid paying the National Living Wage or to dismiss or select for redundancy because they qualify for the new rate.

What will your future strategy be?

The government has said that they’ll slow the National Living Wage increases from 2025, but it’s always worth having a plan in place in case the Living Wage rises substantially again in the coming years.

Whatever direction you decide to take, make sure you keep on top of the rate changes; it’s too costly to ignore.

Elaine Pritchard is HR policy consultant at Moorepay.

Further reading on the National Living Wage

Employees to be given flexible working rights from first day – The new legislation will give employees the right to ask for flexible working from day one and shorten the employer’s response time

How to elevate employee engagement levels – Pietro Carmignani, UK country manager at Gympass, provides some simple tips to empower staff and keep them engaged

How to manage an employee’s pay rise request – If an employee has come to you with a pay rise request, what do you do? Here are five tips to help achieve the best outcome for both parties