National Living Wage increase and rising employment costs

The 9.7% uplift to the National Living Wage (NLW) from April 2023 should be welcome news for lower-paid workers but could present problems if their employer simply cannot afford the increased cost of employing them.

The cost-of-living crisis is impacting many businesses, especially those in the hospitality sector. Some will cope with rising employment costs by reducing their headcount, but others may have no choice but to close up shop. Small businesses owned by self-employed people are likely to be hit particularly hard.

On top of this, the freezing of the employer national insurance contribution (NIC) threshold until April 2028 will also mean an increased NIC cost for many businesses.

Wage increase

The NLW is paid to employees aged 23 and over, with similar percentage increases to the rates payable to younger employees. The percentage increase for 21- to 22-year-olds at 10.9% is even higher.

• For each full-time worker aged 23 and over, the increase will see employers having to pay nearly £2,000 more a year in gross salary, with pension, holiday pay, and NIC costs on top.
• There will probably be a knock-on effect higher up the pay scale, with other employees looking for an equivalent salary boost.

Some employers might be tempted to try and cut their wage bill by turning to ‘self-employed’ workers. However, employment status is not simply a matter of choice, and incorrect categorisation can have serious implications.

NIC threshold

The employer threshold is to be frozen at its current level of £9,100, although the annual employment allowance of £5,000 will shield smaller employers (with just two or three employees) from the impact of this decision.

Larger employers will see a stealthy increase in their NIC cost as wages increase, but the starting threshold for NIC remains unchanged.

The minimum wage rates from April 2023 can be found here.

How can we help you?

If you need help with your payroll or your employer’s NI contributions, then please do contact us on 01444 716946 or on 01273 963656 or alternatively email us.