The national living wage is a ticking time bomb of hidden costs for British businesses

Hayley Kirton
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The national living wage is expected to hit British businesses with hundreds of millions in hidden costs this year, in addition to the £804m already estimated – hindering investment and creating a time bomb that will blast through bottom lines by 2020.

Figures from the government’s regulatory watchdog show employers may find themselves dealing with the fallout of a “wage spillover”, having to boost the pay of other staff to maintain pay bands.

A Regulatory Policy Committee note suggests that these pay rises will cost employers another £234.3m in the first year alone, potentially bringing these hidden costs over the £1bn mark in five years’ time.

George Osborne’s flagship policy, which comes into effect today, will slap employers with wage and other employment costs, such as national insurance contributions, amounting to £804m.

John Harding, an employment tax and reward partner at PwC, told City A.M.: “Most businesses overestimate the impact in the first year, but dramatically underestimate the impact in four or five years' time.”

From today, employees over the age of 25 are entitled to at least £7.20 per hour for their toil.

Approximately 1.7m private sector employees will be affected, according to the RPC.

Although London’s wage bill will barely budge to start with, that could all change as the rate is increased over time.

Meanwhile, a report released today by the Social Market Foundation (SMF) and Adecco warns that investment in the UK could be hit by the wage hike.

“Lack of clarity on the new national living wage rate to 2020 will only make it harder for employers to plan ahead and make the vital investment needed to meet the government’s vision of a high productivity, high wage economy,” said Nida Broughton, chief economist at the SMF.

The SMF believes that the government’s ambition for the NLW to hit 60 per cent of median wages in 2020 means it is unclear whether the final rate will be the expected £9 per hour or something completely different.

Ryan Bourne, head of public policy at the Institute of Economic Affairs, warned that employers may choose not to absorb costs, opting to slash staff instead.

He pointed to the government’s predictions that the introduction of the NLW will, by its own estimate, “result in 60,000 fewer people employed by 2020”.

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