top of page

How Will the 2024 UK National Minimum Wage Changes Impact Small Businesses Profits?

a small business owner doing payroll

As the calendar flips to April 2024, the UK’s National Minimum Wage (NMW) undergoes a seismic shift. Brace yourself—this is no ordinary tweak; it’s the most substantial increase we’ve seen. The repercussions will reverberate through businesses, especially small business already grappling with escalating costs. Let’s dissect the details and understand how this wage revolution impacts small business profits.


The New Rates: A Closer Examination

The diligent Low Pay Commission (LPC) has been advising the government on NMW rates. Here’s what’s on the horizon:

  1. National Living Wage (NLW) for 21 and Over:

  • Old Rate (2023): The NLW stood at £10.42 per hour.

  • New Rate (April 2024): Brace yourself—it leaps to £11.44, marking an impressive 10% increase in cash terms.

  1. Other Age Groups:

  • 18-20 Year Olds: Their hourly rate rises to £8.60, reflecting a robust 14.8% increase.




  • 16-17 Year Olds and Apprentices: They’ll now earn £6.40 per hour, a substantial 21.2% boost.


The Impact on Small Businesses

For small businesses, every penny counts. The NMW hike translates directly into higher labor costs. Let’s crunch the numbers:

  • Full-Time Employee: Imagine a dedicated team member working 37.5 hours per week.

  • Annual Pay Increase: The NLW bump adds a hefty £1,994.36 to their yearly earnings.

  • Monthly Boost: Their monthly pay surges by £166.20.


And as an employer, remember that the NMW increase also triggers additional costs—employers’ national insurance and pension contributions. The true cost to your business is more like £2,400.


Strategic Responses: Price Adjustments or Status Quo?

In the dynamic world of small business, cost fluctuations are inevitable. When faced with rising wage costs, entrepreneurs often stand at a crossroads. Should they silently absorb the costs or take decisive action by adjusting prices?


Here are two critical angles to consider:

  1. Profitability Impact: Passing on price increases to customers safeguards your profits. Otherwise, you’re working just as hard for less money. As a rule of thumb, aim to ensure that no more than 20% of your customers escape the full price increase.

  2. Cash Flow Considerations: While profitability matters, don’t overlook cash flow. Understand how these changes affect your liquidity. As a financially savvy business owner, consider these steps:

  • Forecast Adaptation: If you have a forecast or budget for the year, seamlessly incorporate the wage increase. If not, create a quick projection using your latest management accounts.

  • Pricing Strategy: Adjust your pricing to reflect the new reality. Transparently communicate these changes to your customers.

Now let's be clear, I’m all for passing on ANY price increases to your customers. Otherwise it’s your profits that suffer, which means you are working just as hard by for less money.

Therefore I always recommend this as your default position. But you do need to have a review of all your customers to understand if there are any that need a slightly different approach.


As a good rule of thumb, you should not have any more than 20% of customers who do not receive the full price increase.


Check Your Approach

And finally, do not forget to check your approach has worked and you have protected your profits. If the only cost change is to your wages, then next time you look at your management accounts you should expect to see:

  • An increase to your sales

  • An increase to gross profit – because your cost of sales ahs stayed the same

  • Your net profit remains the same.


0 comments

Comments


bottom of page