New research from the Federation of Small Businesses (FSB) reveals that small business owners are cutting profits and productivity-enhancing investments in an attempt to absorb inflation-beating wage increases.


The FSB surveyed more than 1,162 business owners and results show that over half (51%) of small firms were paying all staff at least £8.21 per hour prior to this becoming the National Living Wage (NLW) rate in April. The figure rises to 56% among microbusinesses (those employing up to 10 staff).


The research also shows 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 ten (71%) lowered profits or absorbed costs in an attempt to handle the hike.


The other most-frequently cited responses to the increase included:


  • Increasing prices (45%)
  • Delaying investment (29%)
  • Reducing hours worked by staff (23%)


In March, the Government launched a widespread international review of minimum wage rates and the Low Pay Commission (LPC) also published its annual consultation on minimum wage rates. In the FSB’s response to this consultation, it stressed that “it is crucial for the LPC to maintain a firm level of independence – the NLW shouldn’t be dictated by arbitrary political targets.”


The FSB has also called on the LPC to take “a cautious approach in working towards an aspirational goal”, encouraging policymakers to “implement any future ambitious pay goal over a ten-year period.”


The FSB also highlights that significant changes to minimum wage levels alone will not achieve the goal of reducing poverty in the UK and that Universal Credit, affordable housing, education, childcare and accessible transport all have a vital role to play.


FSB National Chairman Mike Cherry said:


“…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.


While politicians are locked in a battle of who can make the boldest promises on pay, they fail to acknowledge that – within many smaller businesses – bigger pay packets often mean less investment, fewer training opportunities and higher prices. With pay now outstripping inflation, it’s harder and harder for small business owners to put funds aside for the investment needed to close the UK’s productivity gap…”

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