Member Article

National Living Wage is auto enrolment ‘blind spot’ for small businesses, warns Sage

Hundreds of thousands of small and medium businesses are set for a financial shock because of an automatic enrolment ‘blind spot’ caused by the new National Living Wage (NLW).

On the third anniversary of auto enrolment’s introduction, and six months before the NLW comes into effect, business software company Sage is warning businesses to prepare now as contributions for more than one million employees is set to increase significantly.

Lee Perkins, Managing Director of Sage UKI commented, “Business owners are bracing themselves for the impact of increased staffing costs with the NLW. What isn’t on their radar currently is the increased pension contributions required for a tranche of employees that will be earning an additional £5,000. From speaking with customers we know this is a major blind spot for businesses and one that needs to be acted upon now!”

The introduction of the National Living Wage means small businesses will need to budget for an increase in wage costs of over £5,000 per employee. Staff are eligible if they are at least 22 years old and under state pension age, earning over £10,000 a year and work, or usually work, in the UK. So far, more than five million people have been enrolled. Any business with one or more members of staff will be required to offer a workplace pension scheme.

By October 2018, small businesses will have to contribute 3 per cent of an employee’s salary into a qualifying pension scheme. By 2020, this will be an additional £560 per year, per employee, for those who are paid the NLW.

“The Low Pay Commission estimates that there are 1,386,000 minimum wage jobs in the country, and these workers deserve to be paid fairly. However, the increased cost of this is in danger of being amplified for small businesses who will be required to make pension contributions that they haven’t budgeted for.

“Business owners need to be alert to this unforeseen cost and act. If you don’t know what the impact will be speak with your payroll provider or accountant now. “

Businesses that currently pay the NLW will have to consider how this increase will affect future succession planning and promotions to the next tier within their business—for example, supervisors and office managers, who are, on average, paid around £5,000 more than those that report to them.

The impact of this increase in wages also shortens the pay gap between the lowest earning employees and their line manager. If this is the case, employees may no longer have an incentive to be promoted for an extra £1,000 to £2,000 in exchange for greater responsibility.

“For small businesses, this could increase the financial burden of having to maintain the pay gap. This new NLW is more than just an increase in wages for the lowest earning employees, and everyone needs to be fully prepared if they are going to be able to cope with these changes. Businesses need to start planning ahead to take auto enrolment and the roll-on effect on the salaries of their other employees into account,” Mr Perkins added.

This was posted in Bdaily's Members' News section by Sage (UK) Ltd .