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Higher national minimum wage and the introduction of national living wage increases business failure

The combined number of retailers, wholesalers, transport and logistics firms and bars and restaurants in "financial distress" has increased by 23% since April 2016. Reports have suggested there is a strong link between rising levels of business distress and the implementation of the national living wage at the beginning of April.

The national living wage came into force in April 2016, following a surprise announcement by then chancellor George Osborne at the 2015 Summer budget. It was introduced at a rate of £7.20 for employees aged 25 and over as a premium on top of the national minimum wage which continues to be paid to younger workers.

Even though an increase in the national living wage will deliver a welcome annual pay rise of up to £600 for full-time staff, this could have a detrimental financial impact on many businesses.

Increases to the national living wage will be made in line with the recommendations of the independent low paid commission, with the intention that the national living wage will reach 60% of median earnings by 2020. It was originally projected to reach £9 per hour by this date. This is now unlikely and it anticipated that an increase to £8.60 will come into effect by the end of the current parliament.

It has been reported that the number of businesses employing lower paid workers that are experiencing financial distress has increased from 78,917 in April 2016 to almost 100,000 in October 2016. “Financial distress” is defined as the business having minor county court judgments filed against it or experiencing a sustained fall in working capital, retained profits or net worth.

The national living wage and higher national minimum wage will enhance the wages of a significant number of employees, some of whom have been historically underpaid for the work which they do. So whilst this is great news for the employees, what does this mean for businesses whose profits are already being squeezed? Will they have to pass these costs onto their customers by increasing prices? If so, what impact will this have on the business if its customers decide to place their business elsewhere? Could they be forced out of business?

If you have any concerns that the national living wage or increase in the higher national minimum wage is having a detrimental effect on your business, you seek advice immediately as there may be a solution to your problems. At Portland we provide solutions for businesses that are in financial distress so that your business can continue to prospect rather than end up in some form of insolvency.

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