With a new National Living Wage coming into effect, Helen Swire asks if employee benefits might take a hit

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The first – and last – Autumn Statement from Chancellor Philip Hammond didn’t drop any bombshells, but it has certainly raised some questions for employers.

The major change is that of the reduction of salary sacrifice, but with the promise of allowing employees to “keep more of what they earn”, Hammond also announced that the National Living Wage will increase to £7.50 in the new tax year (6 April, 2017).

Nobody, whether politician or employer, is likely to criticise a higher NLW, but there are nonetheless some question marks over the implications for companies.

Impact on employers

With the reduction of tax-efficient benefits on offer, compulsion to pay into pension schemes via auto-enrolment, and now an increased living wage, some UK businesses may well be feeling the squeeze – and employers may consider freezing pay rises to make up the deficit.

Deborah Rees, director of consulting, Innecto Reward Consulting, says: “As most businesses have planned for the cost ahead of the change in April – and it’s lower than expected – the only likely impact is a cut in the pay pot for other employees.”

However, she warns: “This is likely to mean base pay increases will fall behind inflation later in the year – meaning real reductions in the value of pay. Added to 12.8% of employers already on a pay freeze, it means that lower-paid employees, those just above the NLW, will be hardest hit.”

It’s not just pay that may feel the pinch: trying to save costs to meet the NLW could mean that some companies will also need to lose benefits, possibly those that are no longer tax efficient.

“Employers are likely to look to cut or re-structure their benefit offer as their National Insurance savings will no longer help to cover their costs,” Rees adds.

Large companies such as John Lewis and Starbucks have already cut back on some of their previously highly regarded benefits, so it is likely that smaller businesses will be finding it even harder to absorb higher costs.

Describing a potential belt tightening, Cathy Monaghan, head of ‘refreshingly different HR’ at PES, says: “Bigger businesses that don’t already pay above the NLW could absorb the increase by improving processes, increasing productivity, introducing workforce redesign and possibly making job cuts. They may be able to pass the increase on to customers or reduce other employee benefits (such as bonuses or overtime pay).”

But the picture for smaller businesses could be even worse. “Those likely to be hardest hit are enterprises that pay low wages and do not have the commercial robustness to drive economies elsewhere or absorb the pain,” Monaghan adds. “For such businesses, the impact could be catastrophic. Smaller businesses are already feeling the impact of auto-enrolment, but their contributions will have to increase again in 2018. The squeeze is all too tight already on small businesses with low-paid workers.”

The broader picture

On the other hand, the NLW has not been increased by the margin that was initially expected for this year, perhaps allowing employers a respite to get their ducks in a row regarding the salary sacrifice changes.

“It has also signalled that the government thinks the original target of £9 per hour in 2020 is likely to be over-ambitious when taking other economic pressures into account,” says Rees.

“However, as it is pegged to the median, any substantial pay rises in the economy as a whole could mean a nasty shock for employers in 2018 as the government struggles to catch the NLW up.”

As employers adjust to the changes in salary sacrifice, a NLW rise of 30p may well seem insignificant – for now.

But with murmurs of possible reduction of other tax relief being removed in the future, for example pensions, many will be considering where they can make cost cuts to mitigate the loss of savings.

“The squeeze is all-too-tight already on small businesses with low-paid workers,” says Monaghan. “Of course, it’s vitally important that working people are able to make ends meet, and the NLW is an important contribution to that. But there’s a balance to be struck with keeping smaller employers afloat in some sectors.

“Perhaps only around half of businesses will be affected by the NLW increase. Many of those will absorb it relatively easily, but for others, survival of the fittest is more than just a cliché – it’s the hard truth.”