An estimated 1.3 million low paid workers will get an immediate pay rise as a result of the National Living Wage. For workers over 25 this will mean that they receive at least £7.20 per hour, providing an effective rise in their gross pay. However once tax and National Insurance payments deductions are taken into account these workers will see a marginal increase in their net income and that is where we should be focusing now.
While this is a very positive development, it offers a limited contribution to the financial wellbeing of employees across the UK’s 30 million strong workforce. Why? Because despite low levels of inflation, the cost of living for the UK population continues to rise, whichever statistic is used to measure it and the cost of consumer credit for millions of people is a key driving factor in this.
So it comes as little surprise that household debt is at its highest ever level. Analysis by the Trades Union Congress has found that unsecured debt per household rose to £11,800 in the third quarter of 2015. As a share of household income, unsecured debt is also the highest it’s been for five years.
The government’s official measures of the cost of living, the Consumer Prices Index and the CPIH (which includes some housing costs), have increased by 0.3 per cent and 0.6 per cent respectively in the last year. But the Retail Prices Index, which many suggest is a more accurate measure of the real cost of living because it includes mortgage repayments, rose by 1.3 per cent over the same period.
People are worried about the cost of living. They’re worried about their jobs too. And the warning from some business groups that employers may be forced to make job cuts in order to cover the costs of the National Living Wage will only increase the concern.
The scale of the debt facing UK employees along with the increase in the cost of living and fears surrounding job stability demonstrate the need for a greater focus on their financial wellbeing. And employers should play their part in this.
People need to be paid appropriately, but that alone is not enough. They need affordable credit too. But the system for obtaining credit is not currently fair. We know that people with poor credit histories or low earnings are often forced to take out expensive credit cards or even resort to payday loans just to make ends meet. They are not able to access the reasonable rates of credit with transparent loan agreements that they should be entitled to.
Unaffordable credit combined with low or static pay means the risk of defaulting on repayments increases, which in turn contributes to a weaker credit history and fuels a vicious cycle of expensive and sometimes crippling debt for those who need affordable credit the most.
Employees over the age of 25 now have the right to earn at least £7.20 an hour. But they should also have the right to be able to cut their credit costs and reduce the burden of punitive interest rates. They should be able to access credit whenever they need it, and more importantly, that they can afford to pay back.
Employers can play a role in this and Neyber’s purpose is to enable them to make loans available to their workforces with non-punitive interest rates and a high approval level. The introduction of Neyber, as a workplace benefit, offers a win win scenario for all concerned. This is because it is cost free for employers to implement and will enable employees to gain, on average, a 5 per cent rise in their net disposable income, as a result of their reduced credit costs. Set in contrast the new National Living Wage adds to employer costs and provides a marginal rise in the gross pre-tax and NI income of its recipients.
With these facts in mind it’s clear to me that the Government has a great opportunity to complete its workplace finance reform agenda. It could achieve this by adding a statutory right of access to fair financial services in the workplace to those now covering hourly pay rates and pension auto enrolment.
For a Prime Minister and Chancellor committed to “making work pay” this should be an obvious legislative priority.
Monica Kalia is the co-founder and chief strategy officer of Neyber, a start-up that allows employers offer their staff competitive loans.