Businesses increasing prices, avoiding investment to cope with rising pay

Latest Federation of Small Businesses survey shows how ever-increasing minimum wage demands are hurting investment and productivity

Small business owners have been paying themselves less, increasing prices, holding back investment and reducing staff hours in response to rising pay.

Seven in ten small business owners (71pc) have eaten into profits in order to absorb the National Living Wage being increased to £8.21 per hour in April. Nearly half of small businesses have had to increase prices (45pc), while 29pc have delayed investment and 23pc have reduced hours worked by staff, according to research.

The Federation of Small Businesses has called for politicians to stop putting up the national minimum wage because rising pay undermines SMEs’ ability to invest and grow.

“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,” said Mike Cherry, the FSB’s national chairman.

“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.”

He called for the minimum wage to be set independently by the Low Pay Commission, which was set up alongside the minimum wage in 1997 to advise on how high the wage could be set before it prices too many workers out of a job.

The FSB’s new survey of more than 1,000 business owners shows that over half (51pc) of small firms were paying all staff at least £8.21 per hour prior to this becoming the National Living Wage rate in April. The figure rises to 56pc among microbusinesses (those employing up to 10 staff).

April’s NLW increase coincided with the roll-out of fresh HMRC reporting requirements, higher employer pension contributions and increases to business rates. Previous FSB research shows that the cost of Government policy interventions to the average small business is up £60,000 since 2011.

The Opposition Labour Party has unveiled plans for a £10 minimum wage for all workers over the age of 16.

Cherry said: “Small businesses continue to be ahead of the curve on pay. More than half were paying all staff the current National Living Wage before they were obliged to do so – an even greater proportion were doing so in the smallest firms.

“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. ”

Further reading

Protecting employees from overworking and minimum wage underpayment

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Tim Adler

Tim Adler is group editor of Small Business, Growth Business and Information Age. He is a former commissioning editor at the Daily Telegraph, who has written for the Financial Times, The Times and the...

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Minimum Wage
Staff Pay