National Minimum Wage increases - PKF Francis Clark
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National Minimum Wage increases

Background

The National Minimum Wage (NMW) is currently £8.21 per hour for over 25s and is due to increase to £8.72 from April 2020.

This increase is part of the proposed increase over the next 5 years to around £10.50 per hour. This increase of £2.29 per hour would equate to an additional £4,700 per year for each employee, assuming a 40 hour work week.

Impact on businesses

The extent to which this will impact businesses will be varied by sector and business. A large number of firms (most recently Aldi) already pay staff in excess of the current and new minimum wage.

However, more labour intensive industries such as retail, hospitality, care and restaurants currently pay a majority of the workforce either at the NMW or £1 in excess of NMW. These industries will be more affected by the increases in the minimum wage which may reduce their profit margins unless they are able to pass this cost onto consumers. These industries are already struggling with a number of high profile retail and restaurant closures already in 2020.

As an example, High Gosforth Park Limited, who operates Newcastle racecourse announced that the £200,000 loss in their most recent accounts was due in part to increases in the minimum wage. Marstons also indicated costs could increase by £2m for the remainder of the financial year as a result of the increase.

If all of this increase in cost cannot be passed onto consumers the onus is on businesses to come up with creative ways to improve margins and profitability.

As firms have to pay staff more, capital expenditure in processes to improve margins may not be made if there is insufficient cash to fund it. This could leave a business with a squeezed profit margin due to the increased staff costs and a loss in competitive advantage as they are unable to invest in technology or processes that could potentially improve profitability.

Alternatively, businesses may take the view that capital expenditure is more attractive now because the comparative cost of capital expenditure to paying increased staff wages for a prolonged period may be less.

Cash flow is key for a business and having to pay increased wages could impact the ability to pay other debts of the business as and when they fall due – which is an indicator of insolvency.

What businesses can do

Recent minimum wage increases have been accompanied by tax breaks for businesses to try to mitigate the impact of the increased wage costs. Business leaders are calling for the government to introduce measures for this reason. This is something to watch for in the March 2020 Budget.

Businesses who would be affected can look at methods available to either improve efficiency of operations to improve profitability or look to pass these costs onto consumers.

Cash management will also be key for businesses to ensure that a business is not only profitable after the NMW increase but has cash to pay staff and other creditors as and when they fall due.

FEATURING: Scott Bebbington
Scott joined Francis Clark Business Recovery as a trainee in 2012 having previously graduated from Cardiff University. He qualified as a Chartered Accountant in 2016.… read more
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