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Small firms taking lower profits because of NLW

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Nearly half (47%) of small businesses cite wages as the main contributor to their rising cost of doing business

The majority (59%) of small firms are meeting the challenge posed by the National Living Wage (NLW) by absorbing the costs and taking lower profits, according to research from the Federation of Small Businesses (FSB).

The FSB’s 2016 Q2 Small Business Index found that 47% of small businesses now cite wages as the main contributor to the rising cost of doing business. About a third (32%) said the new wage has led to some increase in their pay costs, and a further one in five (19%) said pay costs went up significantly as a result of the new rate.

Some firms have had to take other action to stay afloat, such as increasing their prices (35%), reducing staff hours (24%), cutting investment (23%), and recruiting fewer workers (16%). Some businesses also sought to meet the increased cost through improving efficiency (13%).

The plans for the National Living Wage were outlined in former chancellor George Osborne’s summer budget in July 2015. At the time Osborne declared: “Britain deserves a pay rise and Britain is getting a pay rise.” It is currently £7.20 per hour but is projected to rise by £1.85 per hour over the next four years, reaching £9.05 by 2020.

The FSB is calling for the Low Pay Commission to be given flexibility on how to meet the government’s NLW target of 60% median earnings by 2020, with the option for the target to be adjusted if it becomes clear the economy cannot bear the rapid pace of increases.

Mike Cherry, national chairman of the FSB, warned that the strategy of reducing operating margins may not remain viable forever and said the Brexit vote had made things more challenging.

“Small employers have stretched to meet the challenge set by the National Living Wage; with many paying their staff more by reducing operating margins,” he said. “This will get harder for many firms in later years, with the targets set in a ‘pre-Brexit decision’ economy.

“Considering the uncertain economic climate, the Low Pay Commission must be given the opportunity to adapt the target in future years so that it can be met without job losses or harming job creation. The rate of the National Living Wage should be set at a level the economy can afford, based on economic and not political priorities.”