The UK’s National Living Wage (NLW) is set to increase once again from 1 April 2025 to £12.21 an hour, as part of Labour’s “Plan to Make Work Pay,” which aims to better reflect the rising cost of living. This increase, coupled with significant changes in the way minimum wages are set, is likely to impact businesses across the UK, particularly small and medium-sized enterprises (SMEs).
The Wider Agenda: Labour’s Plan to Make Work Pay
The proposed changes to the NLW are part of a larger agenda to reform workplace rights under the Labour Party’s newly renamed “Make Work Pay” initiative. This initiative aims to improve pay and working conditions while also addressing other areas, such as trade union legislation. Among the key proposals is a move toward “day-one rights” on issues like unfair dismissal, parental leave, and sick pay, although some of these provisions may still be subject to employer exemptions.
While these changes have been welcomed by workers’ rights groups, they have raised concerns among business groups, who fear the impact on their overheads and flexibility. As a result, many of the original proposals have been watered down. However, with a clear focus on improving pay and workplace rights, employers must prepare for the financial and operational adjustments that will come with these new measures.
The Current National Minimum Wage Rates
As of 1 April 2024, the current NMW rates are as follows:
- 21 & over: £11.44
- 18-20: £8.60
- Under 18: £6.40
- Apprentice: £6.40
These rates have already placed pressure on businesses, and with the forecasted increase in April 2025, businesses will need to prepare for the next wave of adjustments.
Preparing for the Rise in National Living Wage
The rise in the NLW presents both challenges and opportunities for businesses. For many, it’s already been a difficult year, with the substantial increase in NLW in April 2024 having a direct impact on operating expenses. With another rise expected in April 2025, employers need to take proactive steps to manage this shift.
- Review Financial Forecasts and Budgets
If your business hasn’t already done this, one of the first steps businesses should take is to review their financial forecasts and budgets. By forecasting the impact of the upcoming wage increases, as well as changes to employers National Insurance contributions, employers can plan how to accommodate higher costs and adjust spending in other areas to maintain profitability.
- Optimise Workforce Efficiency
Employers can offset the impact of higher wages by investing in training and performance management. Boosting workforce efficiency and ensuring that employees are working at their full potential can help businesses make the most of their staffing costs.
- Streamline Operations and Reduce Costs
In addition to optimising the workforce, businesses should look at streamlining their operations. This could include reviewing processes, cutting back on non-essential expenses, and improving supply chain efficiency. Exploring alternative revenue streams or adjusting pricing strategies may also help businesses offset the increased wages.
- Review Salary Structures and Employee Incentives
With the increase in the NLW, businesses should also consider reviewing their salary structures and benefit packages. Offering employee incentives, such as share options or non-cash benefits, may be more tax-efficient than raising base salaries across the board.
- Avoid Risks with Salary Sacrifice Schemes
Employers should also be mindful of any existing salary sacrifice schemes, which could be affected by the NLW increase. If these schemes reduce salaries below the NLW rates, they may no longer be compliant, and adjustments may be needed to avoid potential issues.
- Retain Talent and Reduce Recruitment Costs
Employee retention will become even more crucial as the cost of hiring rises. By investing in employee development, creating a positive workplace culture, and offering competitive pay and benefits, employers can reduce turnover and save on recruitment costs. Retaining skilled workers will be key to maintaining business continuity and profitability in the face of rising wages.
- Government Incentives and Long-Term Planning
Lastly, businesses should keep an eye on any government incentives that may be available to help mitigate the impact of wage increases. Engaging in long-term strategic planning and considering potential government support schemes can provide some relief and help businesses navigate these changes.
Conclusion
The upcoming increases in the National Minimum Wage are part of a broader push to improve workers’ rights and wages in the UK. While these changes are beneficial for employees, they present challenges for businesses, particularly those with tight margins. By taking proactive steps, including reviewing budgets, optimising workforce efficiency, and adjusting compensation strategies, employers can better navigate the financial pressures ahead. Careful planning and adaptability will be essential for maintaining business profitability and ensuring compliance with the new wage legislation.
