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If you like many, are confused about what exactly the ‘National Living Wage’ is all about, then you’re not alone. Even the EST team have been asking each other what the difference is between the ‘National Living Wage’ and the more commonly discussed ‘Living Wage’.

rhian hr consultant estTo answer simply, The Living Wage, which was created and calculated by The Living Wage Foundation, is a voluntary hourly rate set independently and updated annually calculated according to the basic cost of living in the UK. It is defined as “enough to meet basic needs and to provide some discretionary income” (currently set by The Living Wage Foundation at £8.25 an hour in the UK and £9.40 an hour in London).

The National Minimum Wage is the minimum pay per hour almost all workers are entitled to by law. The minimum wage rate depends on a worker’s age and if they’re an apprentice.

Currently there are four different hourly rates covered under National Minimum Wage legislation;

  • £6.70 for workers 21 and over
  • £5.30 18-20 years
  • £3.87 for 16-17 years, who are above school leaving age but under 18
  • £3.30 for apprentices under 19 or 19 or over who are in the first year of apprenticeship.

The new ‘National Living Wage’ being introduced by the Government as of 1 April 2016, sees a new ‘rate of pay’ for those aged 25 and over at £7.20 per hour. Many may simply view this as a higher tier within the National Minimum Wage.

Impact on business

It’s important to consider the huge impact this is going to have on businesses across the UK, who are not only being hit by this higher rate of pay, but with the double whammy of pension changes. The Federation of Small Businesses, which represents around 200,000 companies across the UK, said the new national living wage will pose “significant challenges” for small firms, particularly in the hospitality, retail and social care sectors.

For employers looking to update contracts and write letters to employees confirming the change in their rate of pay, they should be careful around the wording they choose to use around National Living Wage going forward. Be careful of the wording around paying employees ‘The Living Wage’. You will need to be clear that you will be increasing to the ‘equivalent of the National Living Wage’ not to get the two confused.

Another impact for employers is not just about implementing these costs for those employees aged 25 and over, but what to do about the differentials. For example, you may have managers or supervisors who may end up being paid the same or only slightly more than the people working under them. Reports have shown that some employers are having to look at freezing the pay of their higher paid employees in order to fund the National Living Wage. Others are sticking to their plans of standard pay rises, which will of course result in those differentials being squeezed. Some businesses that have already prepared for this have decided to look at larger pay rises for their managers/supervisors, which will retain the difference in pay between those two groups.

The challenges ahead

Businesses should be thinking about not just what they will do this April, but how their pay and grading structures will look for future years.

It’s worth also thinking about the big changes businesses will have to make to their payroll function. This new legislation is adding another layer to an already very complex system alongside Auto Enrolment. So thinking about accurate record keeping and thorough management of payroll will definitely help you here.

And what is going to happen in the future? We already know the Government’s target which could reach over £9 an hour by 2020. The Low Pay Commission will make recommendations in October 2016 on the rate of National Living Wage for April 2017 and possibly an early indication of the April 2018 rate.

Those that fail to comply risk being named and shamed….and who wants to be branded a bad employer?! If you haven’t done so already, start thinking about the impact that these changes will have on your own business. And why not speak to the experts at EST HR today, who can guide you in the right direction.