Increases in the National Living Wage: What it means for small businesses

The Autumn Budget 2024 introduced a rise in the National Living Wage (NLW) to £12.21 per hour for employees over the age of 21, which will come into effect in April 2025. This increase aims to support low-income workers as they face rising living costs, but it also brings potential financial challenges for businesses that rely on minimum-wage labour, such as those in the retail and service sectors. Here’s a look at how this change may impact your business and how to start preparing.

1. Higher payroll expenses

For businesses employing minimum-wage workers, the rise to £12.21 per hour represents a substantial increase in payroll costs. Small and medium-sized enterprises (SMEs) in retail and hospitality may feel this change acutely, given their reliance on hourly staff. As payroll costs rise, businesses may need to reconsider budgets and potentially scale back on non-essential expenditures to manage this shift effectively.

2. Profit margin pressure in retail and services

In sectors where profit margins are already tight, such as retail and hospitality, higher labour costs can make it challenging to maintain profitability without making adjustments. Businesses may need to assess their pricing structures to determine whether a price increase is feasible or if other efficiency measures, such as reducing hours or increasing automation, are viable to offset rising costs.

3. Hiring and workforce management adjustments

Some businesses may need to revisit their hiring strategies. With increased wage obligations, companies might limit new hires or rely more on part-time staff to control costs. This change could also drive some retail businesses to adopt more flexible, tech-driven models, such as self-checkout systems or online customer service solutions, to reduce reliance on in-store staff where feasible.

4. Potential for price increases

To cover higher wages, some businesses, especially those with already high labour expenses, may consider passing on the costs to customers through slight price increases. This approach will require careful consideration, as businesses will need to balance the new pricing with customer expectations and competitive positioning.

5. Evaluating workforce efficiency

The NLW increase presents an opportunity for businesses to improve operational efficiencies. This may include optimising scheduling, reducing non-essential hours, and investing in training programs to ensure that staff productivity remains high. Reviewing workflows and implementing productivity-enhancing technologies can help offset the increased payroll expense without significantly impacting service quality.

6. Taking advantage of financial planning and support

Businesses should consider consulting financial advisors to navigate the upcoming changes effectively. At JW Hinks, our team can provide guidance on structuring payroll and budgeting to align with the NLW increase. Financial planning can also help you take advantage of available government grants for technology and operational upgrades, potentially reducing overhead costs in other areas.