Business owners sacrifice investments in response to rising pay: New research

New FSB research reveals that small business owners are cutting profits and productivity-enhancing investments in an attempt to absorb inflation-beating wage increases.      

Its new survey of more than 1,000 business owners showed that over half (51 per cent) of small firms were paying all staff at least £8.21 per hour prior to this becoming the NLW rate in April. The figure rises to 56 per cent among micro businesses (those employing up to 10 staff).  

FSB revealed that the most common response to April’s NLW increase among small business owners directly affected by the change is to pay themselves less: seven in 10 (71 per cent) lowered profits or absorbed costs in an attempt to handle the hike. The other most frequently cited responses are increasing prices (45 per cent), delaying investment (29 per cent) and reducing hours worked by staff (23 per cent).

April’s NLW increase coincided with the roll-out of fresh HMRC reporting requirements, higher employer pension contributions and increases to business rates. In March, the government launched a widespread international review of minimum wage rates. Two months later, the Labor Party unveiled plans for a £10 minimum wage for all workers over the age of 16.   

“Small businesses continue to be ahead of the curve on pay. More than half were paying all staff the current NLW before they were obliged to do so — an even greater proportion were doing so in the smallest firms,” said FSB national chairman Mike Cherry.

“We’re now seeing more small business owners than ever saying that living wage increases are impacting the bottom line. Their first instinct is usually to take the hit personally, paying themselves less rather than cutting staff.”

Moreover, he said, it’s getting harder for small business owners to put funds aside for the investment needed to close the UK’s productivity gap. 

“Policymakers of all stripes need to recognise that higher minimum wage rates are not a silver bullet. Ending poverty means taking action on various fronts, not simply burdening smaller businesses with more costs,” Mr Cherry said.

He also suggested: “Future increases to wage rates should be determined by an independent Low Pay Commission basing recommendations on economic realities, not inflexible targets.”

He called for caution from the LPC, reiterating the FSB’s warning against “arbitrary political targets” for wages.