The Chancellor highlighted both the labour and skills shortage in the Budget together with a number of new initiatives designed to attract workers to the UK in key areas, including:
However, with unemployment predicted to be at just 5% and wages rising in real terms by 3.5% a year, many employers are struggling to find the talent they need to build businesses without offering higher wages and are therefore seeing an increase in their labour cost base. Two further employment cost increases will add to that cost pressure:
While the changes to the NIC limits are marginal, the introduction of the Health & Social Care Levy will add 1.25% to both employees and employers Class 1 NIC (including Classes 1A and IB) and to Class 4 NIC from 6 April 2022 (a combined increase of 2.5%). This increase will be reversed in the 2023-24 tax year but will be replaced by the new levy in the same amount. In addition, the Health and Social Care Levy will apply to those over state retirement age who do not currently pay NIC.
The increases to NMW and NLW announced will have the biggest impact on those sectors who rely on large numbers of low paid employees, namely hospitality and leisure, retail and agriculture. These are the industries which were hardest hit by both the impact of COVID-19 and the reduction in available overseas labour post-Brexit. The increases in minimum wage range from 4.1% to 11.9% for apprentices so for many will represent a cost of labour increase of over 6% for low paid employees.
To combat these issues in previous years, businesses may have looked to use contractors rather than employed staff. However, following changes to the off-payroll working rules and an increase in HMRC’s scrutiny of employment status for tax, this is no longer a straightforward option.
For those employers engaging workers paid at or around the current NMW rates, the increases will come as a direct cost. When combined with the NIC increases next year for the Health & Social Care Levy, the combined increases are also expected to affect the pay rates for higher paid workers as an upwards pay pressure is felt from those who pay rises in line with NMW. Even if your workers are already paid well over the NMW rates, the combined effect of the NMW increases, the NIC changes and a general shortage of suitable workers are all expected to push pay levels up.
The answer to whether you can easily control these costs will largely depend on the profile of your workforce, whether or not you are currently struggling to recruit and retain workers and the scope for passing on costs to customers. The simplest, but most costly, option is for an employer to bear the costs in full themselves but not many employers are expected to be able to do this so the expectation is that most employers will look to pass on the costs to customers over time. Obviously, if the increase in costs can be minimised, it might make it easier for them to be passed on but how can this be achieved?
Options to consider include: