THE introduction of a new national living wage will pose “significant challenges” to small and medium sized businesses, particularly those in the hospitality, retail and social care sectors, industry groups have warned.
In the first Conservative Budget since 1996, chancellor George Osborne outlined plans to increase the national minimal wage of £6.50 and hour to £9 by 2020. The new living wage will be introduced for all workers aged over 25, starting at £7.20 an hour from April 2016.
The increase, which will give around 2.5 million people an average wage rise of £5,000 over five years, is offset by a 50% increase to the National Insurance employment allowance to £3,000 from 2016. At the same time, the chancellor unveiled a cut in the headline rate of corporation tax to 19% in 2017 and 18% in 2020.
Nevertheless, business lobby groups remain concerned about a higher minimum wage.
John Cridland, director general of the CBI, said: “Small shops, hospitality firms and care providers are the businesses that will face real challenges in affording the National Living Wage. Delivering higher wages can only be done sustainably by boosting productivity.”
John Allan, national chairman of the Federation of Small Businesses, said the increase in the employment allowance is “unlikely to fully off-set” the increase in costs brought in by the new minimum wage.
“In the past the Employment Allowance has enabled members to increase wages and spending on staff training. Going forward we expect the allowance to primarily be used to meet higher wage costs,” he said.
Business was not universally opposed to the chancellor’s deal on higher wages for lower taxes. Simon Walker, director general of the Institute of Directors, said the 90% of its members already pay the living wage and will accept the deal.
“We should not understate the boldness of this move, and many businesses will have been taken by surprise, but the IoD accepts that after several years of slow wage rises, now is the time for companies to increase pay,” he said.
But the IoD did not back all of the government’s measures. Stephen Herring, head of taxation at the institute and a former partner at BDO, said the annual investment allowance has been set too low.
From January 2016, the amount businesses claim back on investment in equipment or other development capital will be set permanently at £200,000. Currently, the allowance is set at £500,000 but was due to fall back to £25,000 at the end of the year.
“A fixed Annual Investment Allowance of £200,000 is far too low, and will not encourage medium-sized business to invest,” said Herring. The current temporary allowance is £500,000, and many businesses were hoping it would have been raised even further. A £200,000 fixed limit is not enough to boost productivity by encouraging firms to invest in plant and machinery.”