Wednesday 20 April 2016 11:00 pm

Nearly 60,000 companies hit by National Living Wage already in “significant financial distress”, insolvency firm warns

Kasmira Jefford covers retail, consumer and property news at City A.M.

Kasmira Jefford covers retail, consumer and property news at City A.M.

The National Living Wage (NLW) risks tipping thousands of vulnerable companies over the edge as they struggle to absorb higher staff costs, one of the UK’s leading insolvency firms has warned.

More than 1.8m workers were given a pay rise on 1 April after a new minimum wage came into force, requiring employers to pay at least £7.20 per hour to staff aged 25 and over. It is expected to rise to £9 an hour by the end of the current parliament.

The move has been welcomed by some campaign groups. However, Begbies Traynor says that for nearly 60,000 companies, implementing that wage rise will be especially tough.

The firm’s quarterly Red Flag research, which monitors the health of UK companies, revealed that there were already 59,608 businesses in the industries most impacted by the wage hike “in significant” financial distress at the end of the first quarter, before the scheme was even introduced.

Read More: Three policies alone could cost UK businesses £29bn by 2020

Begbies Traynor partner, Julie Palmer, said: “With nearly 60,000 low-wage employers starting the new tax year in such a dire financial state, this doesn’t bode well for their ability to absorb the extra costs that come with the implementation of the new National Living Wage."

“These struggling businesses have already had to take drastic steps to mitigate the immediate cost impacts of the Living Wage on their businesses, including reducing overtime and bonuses, passing on the higher costs to customers through inflated prices, reducing staff numbers and in many cases, cutting the pay of workers under 25."

“What’s more, the latest economic projections predict that the long term costs of the new scheme could be in the billions, which is an extremely worrying prospect for the thousands of UK employers affected by the change. My concern is that, as more of the hidden costs begin to emerge, many companies could find themselves stretched to breaking point.”

The findings come after the Office for Budget Responsibility (OBR) recently warned that “wage spill over” – where employers will have to boost the pay of other staff to maintain pay bands – could cost employers another £234.3m in the next year alone.

This is in addition to the £804m in extra wage and National Insurance contribution costs that businesses are likely to incur, according to research by the Regulatory Policy Committee.

The British Retail Consortium (BRC) believes that UK retailers will have to find £3bn a year by 2020 to pay for the increased wage burden associated with the scheme.


 Firms in "significant" financial  distress 

% change year-on-year
Sports and health businesses 4,638 27
Wholesale outlets 6,010 25
Hotels 3,540 25
Bars & restaurants 15,665 19
Retailers 21,129 18
Industrial transport and logistics firms  3,178 18
Food & drug retailers  5,448 16

The OBR has forecast around 60,000 jobs will be cut as a direct result of the higher costs brought on by the change.

The Federation of Small Businesses (FSB) said that well over a third (38 per cent) of its members would be negatively impacted by the new NLW.

FSB chairman Mike Cherry told City A.M.: “Policymakers should be looking at ways to support existing businesses and boost start-ups, not causing business owners on the brink of survival to give up and shut down.”

Read More: Trouble percolates for Caffe Nero over living wage

Chancellor George Osborne this week sent a warning to businesses cutting benefits to make up for higher wages, saying that the move would come at the expense of their reputation.

His comments came after Cafe Nero scrapped its policy of free food for staff, giving them a 65 per cent discount on food instead. “It’s not the spirit of the law. Companies should be much more careful about their reputation,” Osborne said.

Sam Bowman of the Adam Smith Institute, which has argued against the higher NLW, said: “If we are already seeing harm now, it’s likely that things will get worse and worse as the NLW rate rises each year. This is in stark contrast to the measured rises we saw under the Low Pay Commission, which was mandated to avoid unemployment. Now the rate is set according to whatever suits Osborne politically”.