National Living Wage will cost large employers an extra £11m each by 2020

Published on: 05/11/2015


As the implementation of the mandatory National Living Wage in April 2016 looms nearer, employers are starting to assess its financial costs. 

The Cost of the NLW

The National Living Wage (“NLW”) is due to come into force in April 2016 for all workers aged 25 and above and for 2016 is set at £7.20 per hour. The current National Minimum Wage rate for workers aged 21 or over is £6.70 per hour. According to a recent survey by PwC of 135 businesses with an average of 11,000 employees, it is expected that this will mean that these employers will have to pay an extra £1.6m each in wages in 2016 on average. For some employers with a higher proportion of workers currently below the NLW, the costs will be higher.

The NLW is set to rise further over the next few years, reaching a target of £9.00 per hour by 2020 (which would represent 60% of the median wage in the UK). This is expected to cost the large employers surveyed, on average, an extra £11 million each by 2020. PwC’s survey found that around 23% of employers surveyed said they currently pay their employees less than £7.20 per hour, with 39% paying less than £9 per hour. It also found that the retail, healthcare, hospitality and leisure, transport and logistics sectors would be worst hit by the pay changes in the next few years.

Transport and logistics sector

In the transport and logistics sector, the survey predicted an increased wage bill of £0.6m on average per employer in 2016, rising to £9m by 2020. Support services firm Interserve have recently confirmed that the increase in wages that it will have to pay to some 15,000 employees could cost the company up to £15m, 12% of its annual profits.

In the retail the figures are an increased wage bill of £3.8m on average per employer in 2016, rising to £25.6m by 2020.

There are concerns that some employers will not be able to afford to pay the NLW. Around 26% of employers surveyed by PwC said that as a result of the increased wages being introduced, they intend to reduce their headcount, which would be likely to result in a rise in unemployment levels and a slowdown in recruitment rates. With the NLW set to apply to all workers aged 25 or over, there may also be a trend for recruiters to take on more workers under the age of 25.

CBI concerns

John Cridland, outgoing director-general of the CBI, commented that requesting employers to introduce such a level of salary increases by 2020 was a “big ask.” In a recent interview he called the NLW a “gamble” and expressed concern that “if the government pushes up wages too fast and more quickly than businesses can accommodate, then business will take out people and replace them with machines”.

He went on to say that it was not in the best interests of the economy or of low-paid workers to have a “labour light service sector that results in forced productivity through a decline in the number of staff working in shops, restaurants and hotels”.

Other critics have called the NLW a re-branding exercise, arguing that it is effectively a higher national minimum wage, given that it is calculated according to what the market can bear, rather than the cost of living.

Not the Living Wage

It is important to note that the NLW, which will be mandatory from April 2016, is different to and lower than the Living Wage, which is a separate campaign led by the Living Wage Foundation. The rates of each are calculated differently - the NLW is based on median earnings, while the Living Wage is based on living costs.

The Living Wage is set to increase, with London’s Mayor, Boris Johnson, confirming on 2 November 2015 that the London Living Wage will be £9.40 per hour (an hourly rise of 25p) and the Living Wage outside of London will increase to £8.25 per hour (an hourly rise of 40p).

The Living Wage is voluntary and applies to all workers over the age of 18 (compared to the minimum age of 25 for the NLW). Around 2,000 employers are already signed up to the Living Wage, including KPMG, Nestle and Aviva. This in turn affects around 70,000 workers. Trade unions, who have long campaigned for the Living Wage to be mandatory, have called the NLW rate a sham as, at £7.20 an hour, is it considerably lower than the current Living Wage, particularly for those living in London.

A study released last weekend revealed that almost 6 million workers, around 23% of the UK workforce, in the UK were paid less than the Living Wage (based on the rates prior to the recent increases), with a large proportion of workers in this category being women and younger workers.

The NLW debate

Supporters of the NLW have argued that there is a huge amount of evidence that employers who invest in their workforce in this way find can that their staff add proportionately greater value to their business.

Some retailers, such as Aldi, IKEA and Morrisons, have already voluntarily adopted the higher Living Wage.

The Living Wage Foundation (who founded and campaign for the Living Wage initiative) recently reported that implementing wages above the Living Wage saw a positive impact on both retention and recruitment for around two thirds of employers asked. The same study reported that 80% of employers noted an increase in the quality of work having implemented the Living Wage.

What should employers be doing?

The introduction of the NLW may be an opportunity for businesses to review their pay and benefit schemes, considering not only the NLW but also other changes expected in the next few years, such as increasing pension auto-enrolment contributions, holiday pay and the apprenticeship levy. Half of respondents to the PwC survey said they were planning to change their pay grading structures in response to the NLW.

Businesses that employ 250 or more workers should also bear in mind that they will need to consider reviewing their salary schemes as a result of the need to publish reports on their Gender Pay Gap from 2016 (the actual date of implementation is still to be confirmed). As we recently reported, the reports will now also need to take into account bonuses received. For further details on the issues surrounding Gender Pay Gap reporting please see here.


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