New research from the Federation of Small Businesses (FSB) shows the majority (64 per cent) of small firms impacted by the National Living Wage (NLW) have stretched to meet the latest rise by taking lower profits.

Two in five (39 per cent) small businesses affected by the NLW have put up prices to cope with the latest increase to £7.50 per hour. A further quarter  have cancelled or scaled down their investment plans, and a fifth have reduced staff hours (22 per cent) or hired fewer workers (19 per cent).

FSB’s research also suggests the faster rising NLW is not increasing demand for younger workers. Less than four per cent of small businesses responded to the NLW increase by hiring more workers under the age of 25, who are on a lower rate.

It comes as business operating costs have surged to their highest in four years, according to FSB’s latest Small Business Index.

The research shows the majority of small businesses are already paying their staff above the new NLW. But there are significant pressures on the 43 per cent of small firms that have had to increase their wages in line with the NLW. Sectors facing the greatest squeeze are those with tight margins where wages are typically lower, such as retail, care and hospitality and accommodation businesses.

In light of the recent string of poor economic statistics and continued uncertainty, FSB has urged the Low Pay Commission to consider whether the Government’s 2020 NLW target may need to be delayed if the economy cannot bear the rapid pace of increases. The NLW is currently projected to rise to £8.75 by 2020. FSB says any risk to the economy should be built into the next NLW increase scheduled for April 2018. For this reason, FSB has recommended the 2018 NLW increases to no higher than £7.85.

Mike Cherry, FSB National Chairman, said:

“Small employers have demonstrated their resilience in meeting the challenge set by the National Living Wage, with many cutting their margins, or even paying themselves less, to pay their staff more. In sectors where margins are tight, small firms are resorting to more drastic measures to cope with the NLW.

“It’s vital that the NLW is set at a level that the economy can afford, without job losses or harming job creation. Cost pressures on small businesses are building, and with most recent economic indicators underperforming, we are now facing the reality that the NLW target may need to be delayed beyond 2020.

“To prevent the growing costs of employment from stunting job creation, the Government should use its Autumn Budget to uprate the Employment Allowance and focus it on the smallest employers.”

Nikki Flanders, COO for Opus Energy commented:

“There is no denying that raising the National Living Wage to £7.50 from April has put added financial pressures on small businesses. However, this move should not be seen as purely an increased cost measure. Ultimately raising the living wage makes good business sense, so whilst there is additional pressure on the bottom line, benefits can be reaped in more than financial terms. The extra pay has the potential to reduce staff turnover, close the gender pay gap – with more than three million women set to benefit – boost employee engagement, along with the benefits to the economy via an incremental boost to disposable income. Therefore, whilst SMEs will feel the burden initially, in the long-term, it is clearly a step in the right direction for society and business.”

Rebecca joined the HRreview editorial team in January 2016. After graduating from the University of Sheffield Hallam in 2013 with a BA in English Literature, Rebecca has spent five years working in print and online journalism in Manchester and London. In the past she has been part of the editorial teams at Sleeper and Dezeen and has founded her own arts collective.