The National Living Wage (NLW) comes into effect in April 2016, and is set to have a significant impact on both employers and employees. Here we explore the NLW and its potential implications for you in more detail.

What is the National Living Wage?

The new compulsory NLW was announced in the 2015 Summer Budget by Chancellor George Osborne. Starting from 1 April 2016, the rate will be set at £7.20 an hour for those employees aged 25 and over. The NLW will give eligible employees a premium of 50 pence an hour on top of the National Minimum Wage (NMW). The new wage is expected to rise to £9 an hour by 2020. This is significantly higher than the NMW rate of £6.70 an hour, which currently applies to employees aged 21 and over.

The NLW is being introduced to help ‘lift the wages of the lowest paid’ and forms part of the Government’s stated intention to ‘move to a higher wage, lower tax and lower welfare society’. It is estimated that 2.7 million people stand to benefit from the introduction of the NLW. However, for those employees under 25, the appropriate rate of the NMW will continue to apply.

The NLW should not be confused with the Living Wage, which is a voluntary wage rate that some employers choose to pay.

Advice for employers

The NLW is likely to have a significant effect on many businesses, and employers are being urged to take steps now to ensure that they are ready. To help businesses prepare ahead of the introduction of the NLW in April 2016, the Government is advising that firms should:

• know the correct rate of pay – £7.20 per hour for staff aged 25 and over
• determine which staff are eligible for the new rate
• update the company payroll in time for 1 April 2016
• communicate the changes to staff as soon as possible.

In recognition that the new NLW will increase costs for some businesses, the Government is raising the amount employers can claim through the Employment Allowance. From April 2016 the Employment Allowance will enable employers to reduce the amount of Class 1 national insurance contributions (NICs) they pay for their employees by up to £3,000. This is up from the previous allowance of £2,000. Small businesses and charities particularly stand to gain from this change.

We can advise on a variety of employment-related issues – please contact our payroll department on 01865 292200 for further information.