National Living Wage Shock To Businesses

1 October 2015

National Living Wage Could Bring A Big Auto Enrolment Shock To Businesses A financial shock could be on the way for hundreds of thousands of businesses across the UK when the National Living Wage comes into force in April 2016.

The National Living Wage has been introduced by the Chancellor of the Exchequer George Osborne, and will effectively replace the National Minimum Wage for millions of workers and will see their hourly pay rise from £6.70 to £7.20 per hour. Businesses may well have prepared and budgeted for the National Living Wage but have they budgeted for the effects this could have on their auto enrolment pension contributions?

Currently, to qualify for auto enrolment, employees need to be over 22 years of age, under state pension age, work in the UK and earn over £10,000 per year. With the National Minimum Wage currently being £6.70 per hour, the introduction of the £7.20 National Living Wage could mean that when re-enrolment occurs, millions more workers could be auto enrolled. Re-enrolment is the repeat of the auto enrolment process and occurs every three years to ensure that anyone who is eligible for a workplace pension who may not have been prior is correctly auto enrolled into one. This, with the expected yearly rise in the National Living Wage could see pension contributions from businesses rise rapidly.

This isn't the only factor that businesses have to consider. Currently, the minimum employer contribution is 1%, but by 2018 this is set to rise to 3%, a significant increase which most employers should be aware of. But what about the National Living Wage? George Osborne has indicated that by 2020 it is hoped this will be £9 per hour. That means businesses could go from contributing 1% of an employee's £6.70 per hour in 2015 to contributing 3% of an employee's £9 per hour in 2020, a large increase.

Businesses who haven't started to prepare for this now could be in for a bit of a shock in the future.

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