The new national minimum wage of £7.20 per hour is in force for workers over 25 and not in the first year of an apprenticeship. However, new research suggests that most SMEs are unaware of this increase and its implications on their business.

A survey of 4,500 small and medium business carried out by Moorepay in March revealed that a third had no idea of the national living wage (NLW) coming into effect.

The same survey found that 86 per cent were in the dark about what this meant for their bottom line.

“It’s not just the higher wages bill that will affect their bottom line but the associated costs, such as national insurance, pension contributions and overtime pay,” Alison Dodd, managing director of Moorepay advised.

>See: Are you prepared for the National Living Wage?

What is the ‘national living wage’?

Chancellor George Osborne announced the scheme at last year’s Summer Budget, with government projections expecting this pay raise to benefit 2.5 million people.The rate is 50p higher than the previous minimum wage of £6.70, which still applies to workers between 21 and 25.

While the NLW is a step towards narrowing pay disparities, it is not the same as the voluntary living wage, which is calculated yearly to account for a ‘decent’ standard of living for full-time workers. The current voluntary living wage is £8.25 outside the capital, while the London living wage is £9.40 an hour. This is paid by 2,300 accredited living wage employers to staff over the age of 18.

By 2020, the NLW is slated to rise to £9 an hour, but even then, this rate will be lower than the present-day London living wage, which applies for all adults, rather than just those over 25.

Loopholes like zero hours contracts

While zero hours contracts have a place in today’s flexible labour market, offering students, freelancers and the semi-retired opportunities to find work that suits their lifestyle. Under a zero hours contact, the employer does not guarantee to provide a minimum number of hours’ work. And considering that the NLW is calculated on an hourly basis, it may be tempting for some businesses to reduce employee hours to keep costs low.

How fair is this NLW?

According to the Resolution Foundation, 4.5 million employees will benefit from the NLW in 2016, which will increase to 6 million – or 23 per cent of all employees – over the next four years.

It’s not all rosy for under-25s, however. The NLW creates a gap for employees under 25 and those older, which could breed resentment and dampen younger workers’ motivation and productivity.

The new NLW rate is 50p higher than the previous minimum wage of £6.70, which still applies to workers between 21 and 25.

Frances O’Grady, general secretary of the British Trades Union Congress said: “This is not fair. Future wage increases must narrow the pay gap between old and young.”

Businesses could take a ‘no employee left behind’ approach and voluntarily pay employees under the age bracket the same minimum wage.

More worrying than an age disparity, a report from KPMG in November revealed that 29 per cent of females earn less than the living wage, compared with 18 per cent of males. The equal pay act, which also comes in effect this month, may see traction for a fairer business landscape in the UK.

Can growing businesses afford this?

Experts note that the NLW will essentially require redistribution from profits to wages. It’s also important to remember that this wage increase will apply to all businesses, including competitors, and generally, an increase in wages will likely translate to more business. “For some time it was easy for businesses to hide behind the argument that increased wages hit their bottom line, but there is ample evidence to suggest the opposite – in the shape of higher retention and higher productivity,” according to Mike Kelly, head of living wage at KPMG.

“The national living wage will force organisations to look at productivity and how to maximise the value from what is often regarded as an organisation’s most valuable asset, its people,” Brenda Morris, general manager UK, Kronos said. “While ultimately organisations need to focus on productivity, just paying employees more will not necessarily drive productivity gains. It’s critical that organisations look closely at the wider benefits that motivate their workforce and how they can tap into these to boost overall performance and profitability.”

Mike Cherry, FSB national chairman, highlighted the cyclical nature of higher wages and productivity. “While it is easy to say everyone deserves a pay rise, the only way to deliver and sustain higher wages in the long run is to improve productivity, boost skills and drive business growth. Without the right type of productivity growth, there is a real risk that in many sectors higher enforced statutory wages will lead to fewer jobs being created, fewer hours for existing staff and, unfortunately in some cases, job losses.”

In the immediate term, growing businesses may feel the cash crunch. “With more cash heading out of the business and increasingly long wait times for payment from suppliers, SMEs are at risk of plunging into poor financial health,” Caroline Langron, managing director at Platform Black explained.

There seems to be a call for the independent Low Pay Commission to continue monitoring and setting minimum wages. FSB’s Mike Cherry added: “This includes having the ability to recommend that the Government deviates from its plan to raise the national living wage to over £9 an hour by 2020, if it becomes apparent that the economy cannot afford it.”