Timeframe:
From April 2025
Action points:
The National Living Wage for workers over 21 will increase by 6.7% in April 2025 to £12.21 per hour, which is worth an extra £1,100 per year for a full-time worker. Meanwhile the National Minimum Wage for 18 to 20-year-olds will go up by 16% to £10 per hour.
Planning points:
Even if your employees are paid above minimum wage, they will no doubt expect a pay increase in line with these changes, so consider how all of this will impact your payroll costs.
Here are some planning points to help you manage the impact effectively:
Adjust your budget and cash flow projections
- Update payroll projections: Calculate the wage increases across your team and incorporate this into your monthly and annual payroll budget. This will give you a clear picture of how much additional cash is needed to meet the higher wage requirements.
- Forecast cash flow changes: Higher wages affect cash flow, so create a cash flow forecast that accounts for these increased costs. This will help you anticipate any shortfalls and avoid surprises.
Revisit pricing strategy
- Consider a small price increase: To absorb the rise in payroll costs, a modest increase in product or service prices can help. Be transparent with customers about the reasons if needed; they may understand that the increase supports fair wages.
- Introduce tiered or premium options: If raising prices isn’t viable, consider adding premium or value-added services that can boost revenue without needing to raise base prices too much.
Evaluate staffing structure and efficiency
- Optimise scheduling: Look at your current schedule to see if adjustments can be made without sacrificing service. Reducing hours in low-demand periods or streamlining shifts can make a difference in managing wage increases.
- Streamline roles: Consider cross-training employees so they can take on multiple roles. This can make shifts more efficient, reduce the need for additional hires, and maximise productivity per hour worked.
Automate and outsource where possible
- Use technology to reduce admin time: Automating processes like payroll, inventory management, and invoicing can reduce admin hours, helping you absorb wage costs without sacrificing efficiency.
- Outsource non-core tasks: If possible, consider outsourcing tasks that don’t require full-time employees. For example, finance or marketing tasks can be handled by freelancers or agencies on a project basis.
Review employee benefits and perks
- Reassess non-monetary perks: Offer perks like flexible working, extra time off, or training opportunities if a raise isn’t financially feasible across the board. These can boost morale and retention without impacting payroll significantly.
- Salary sacrifice schemes: Options like enhanced pension contributions or cycle-to-work schemes can help lower employee taxable income, giving them additional benefits without a direct pay increase.
Monitor the impact on profit margins
- Track expenses closely: As wage costs rise, keep an eye on profit margins and aim to reduce other variable costs where possible. Consider switching to lower-cost suppliers or negotiating better terms to protect profitability.
- Seek alternative revenue streams: Look for complementary products or services that you can add to your offering to increase revenue per customer without needing to expand payroll.
Apply for available government support and grants
- Look into small business support grants: Some regions or councils offer grants to help small businesses manage wage increases. Check with your local council or small business organisations for relevant programs.
- Explore training or apprenticeship programs: If you need additional support but can’t afford higher wages for all positions, government-backed training or apprenticeship schemes may provide lower-cost solutions.
Communicate with your team
- Be transparent about the changes: Explain to your employees why certain adjustments might be necessary, such as changes to scheduling or additional responsibilities. Engaging them in open communication can help with morale and retention.
- Encourage feedback on efficiency: Employees often have valuable insights into what’s working and what isn’t in the daily workflow. Their feedback can help you streamline operations and better manage the impact of wage increases.
With these adjustments, you can manage the increased wage costs while keeping your business running smoothly and profitably. Keeping an eye on your budget, maximising efficiency, and communicating openly with your team will help ease the transition.