Thousands of UK businesses struggling to absorb cost of National Living Wage

New data from Begbies Traynor, the UK’s leading independent insolvency firm, reveals that nearly 60,000 UK companies that were forced to implement the National Living Wage on 1 April were already in a dire financial state before the scheme was even introduced, suggesting that the UK could see a spate of business failures in 2016 as these companies struggle to absorb the higher staff costs associated with this new regulation.

According to Begbies Traynor's Red Flag Alert research for Q1 2016, which monitors the financial health of UK companies, 59,608 businesses in the industries most impacted by the National Living Wage (i.e. those that predominantly employ lower-paid or part-time workers) ended the first quarter of 2016 in a state of ‘Significant’ financial distress; a 20% increase compared to the same period last year (Q1 2015: 49,833 companies).

This group of struggling companies includes 4,638 Sports and Health businesses, 6,010 Wholesale outlets, 3,540 Hotels, 15,665 Bar & Restaurants, 21,129 Retailers, 3,178 Industrial Transportation & Logistics firms and 5,448 Food and Drug Retailers, which all ended the first quarter of 2016 in a state of ‘Significant’ financial distress; up 27%, 25%, 25% 19%, 18%, 18% and 16% respectively year on year.

Corroborating Begbies Traynor’s data, the Government’s own regulatory watchdog recently warned that “wage spill over” - where employers will have to boost the pay of other staff to maintain pay bands - could cost employers another £234.3m in the next 12 months alone, over and above the initial cost of implementing the National Living Wage for workers over the age of 25.

Meanwhile The British Retail Consortium lobby has said that UK retailers will have to find £3bn a year by 2020 to pay for the increased wage burden associated with the scheme.

Julie Palmer, Partner at Begbies Traynor, says:

“With nearly 60,000 low-wage employers starting the new tax year in such a dire financial state, this doesn’t bode well for their ability to absorb the extra costs that come with the implementation of the new National Living Wage.

“These struggling businesses have already had to take drastic steps to mitigate the immediate cost impacts of the Living Wage on their businesses, including reducing overtime and bonuses, passing on the higher costs to customers through inflated prices, reducing staff numbers and in many cases, cutting the pay of workers under 25. However these severe measures, while effective in the short term, are unappealing for customers, staff and the businesses themselves and unfortunately do not offer a long term solution to the problem.”

“What’s more, the latest economic projections predict that the long term costs of the new scheme could be in the billions, which is an extremely worrying prospect for the thousands of UK employers affected by the change. My concern is that, as more of the hidden costs begin to emerge, many companies could find themselves stretched to breaking point.”