The National Minimum Wage is increasing from April 1st

What is the National Minimum Wage, and how does it work?

The National Minimum Wage is the minimum per hour rate most workers (23 and above) will be legally entitled to, currently at £8.91. As of April 1st 2022, it will rise to £9.50, representing an increase of 6.6%, or 59p, a significant step closer to the Government's 2024 target of two-thirds of median earnings, estimated at £10.50 an hour.

The National Minimum Wage was a flagship manifesto commitment of the Labour party during their successful 1997 general election, becoming law in 1999. The policy sets out a rise every few years, in line with increased living costs (inflation) and ensures all workers are paid a reasonable minimum hourly rate dependent on age and status.

What is the difference between the National Minimum and National Living and Living Wages?

Understanding the difference between the National Minimum Wage, the National Living Wage, and the Living Wage is essential for any small business owner with employees. The penalty for failing to pay your employees correctly can be substantial.

‍To help with any uncertainty, we'll take a look at these terms and explain what they mean:

When do employers need to raise rates of pay?

Employers must increase their pay rates from April 1st, being a criminal offence to avoid paying employees either the National Minimum Wage or the National Living Wage later than April. Failure to pay could result in a significant fine from HMRC (up to 200% of the underpayments) and repaying employees any outstanding sum.

How will the national minimum wage impact UK businesses?

Chancellor Sunak stated that the increase in the NMW and NLW will ensure the UK is "making work pay and keeps us on track to meet our target to end low pay". Since the increase in NMW has a corresponding effect on National Insurance contributions, income tax contributions and pension scheme contributions, many small businesses could find the requirement challenging. 

How to manage increases in employee salaries

 1. Cash flow review

Examine your cash flow and review all money coming in and out of your business. Plan your spending to be aware of upcoming expenses by creating a cash flow forecast, where you can work out what funds you need over the next few months.

 2. Cut costs

If your business needs increased working capital, cutting costs and reducing overheads is the obvious solution. However, you should carefully consider where and how to make these cuts to endure you're not adversely affecting long term viability.

You could perform a common-sense forensic audit on every aspect of your business. Here are four suggestions to consider:

• Can you cut non-essential spending?

• Could you move to a cheaper location?

• Can suppliers reduce their costs?

• Can you reduce staff hours while still maintaining profitability?

 3. Consider alternative finance

It could be worth taking short-term funding or other alternative finance measures to cope with the NMW increase. Be sure that you fully understand the repayment structure, perhaps using a cash flow forecast to ensure the numbers crunch in your favour.

 4. Explore government schemes

If the pandemic has adversely affected your business, The Recovery Loan Scheme could be an option for you. Running until June 30th 2022, the scheme enables businesses to take out loans of up to £2 million, with the Government backing 70% of the cost to the lender.

Statutory Rate Increases 

Amendments to statutory payments will also come into effect in April. These signify imminent increases to statutory redundancy pay and statutory maternity pay.

Statutory Redundancy Pay Cap

Employees are typically entitled to statutory redundancy pay if they've been employed and working for you for two years or more. The benefit requires employers to use the employee's weekly pay amount. Currently capped at £544, the amount is revised yearly in line with inflation, increasing to £577 come April.

Statutory Maternity/Paternity Pay 

When an employee is on maternity, paternity or shared parental leave, the first six weeks of Statutory Pay (SMP) is 90% of their weekly earnings. For the next 33 weeks, it is either continued at 90% or paid at the flat SMP rate, whichever is the lower amount.

In April, the rate will increase from £151.97 to £156.66. Employers can reclaim 92% of employees' Statutory Maternity, Paternity, Adoption, Parental Bereavement, and Shared Parental Pay directly from the Government.

Statutory Sick Pay

When employees are on sickness absence for four or more consecutive days, they're entitled to Statutory Sick Pay (SSP), which can last up to 28 weeks if any single period of sickness renders them incapable of working. 

The rate of SSP will rise in April 2022 from £96.35 to £99.35.

Keeping up to date with the rises in statutory rates can be time-consuming and complicated for many employers. However, not paying rates can be significant, so it's critical to ensure that all correct procedures get followed. 

At Funding Options, we specialise in helping SMEs with these complex matters. Start an application today, and one of our business finance specialists will be in touch to walk you through your options.