How will the National Living Wage affect contractors and recruiters?

Much has been said about the arrival of the new Living Wage in April – most of it negative and highly controversial. Granted the move could have an impact on contractors and recruitment agencies alike, but with proper preparation and by drawing on the expertise of trusted partners, the move should bring benefits for most.

In recent weeks some have claimed the new Living Wage will send “shockwaves” through recruitment agencies as businesses scale back on recruitment plans while the CBI went as far as saying the Chancellor was gambling on our economic stability and it would deliver another major blow to the nation’s army of flexible workers – a vital lifeline of expertise for British businesses.

In essence, the move delivers good news on one hand – an increase in wages for six million people across the UK – but also takes away with another. It adds more layers of complexity for the self-employed and will affect the amount contractors can offset through expenses. Assuming they haven’t been caught out by the new travel and subsistence restrictions.

What is the National Living Wage?

Put simply, the National Living Wage is the new name for the National Minimum Wage and is the Government’s latest attempt to combat poverty by enforcing wages that guarantee a basic standard of living for most families.

From April 1, 2016, employers will be required to pay anyone over the age of 25 a minimum of £7.20 an hour. The Living Wage Foundation calculates that the actual wage needed for families to survive is at least £8.25 an hour and, in recognition of this, the Government’s Living Wage will increase each year to at least £9 an hour by 2020.

The change in April represents an inflation-busting increase of more than seven per cent on the current minimum wage – or a 50 pence rise per hour. It represents a major burden on employers and many have warned they may hold off on recruitment plans.

It also raises the question of who will be expected to take on the burden – employers, recruitment agencies or others involved in the contractor supply chain? The Government argues employers will once again absorb the increased costs – as they did with the arrival of the minimum wage several years ago – but contractors, self-employed people and freelance workers could be hit hardest as businesses hold off on calling in external expertise and support.

How will the National Living Wage affect contractors?

The flexible workforce at the heart of UK PLC has been under a fair amount of scrutiny in recent years and has been hit with wave after wave of new restrictions, taxes and legislation. Once again this will impact on the sector.

For those caught out by the new restrictions on travel and subsistence claims, this is good news. While they will no longer be able to claim cash back for commuting, accommodation and food, they will see an increase in the amount they are paid if they are currently under the Living Wage limits.

However, if you don’t fall foul of supervision, direction and control rules and are able to legitimately claim expenses, this change in wage regulations could affect the amount you take home in a small way. By increasing the minimum wage, the Government has limited the amount of headroom contractors have for offsetting tax through expenses. By deducting legitimate expenses as a benefit and then reimbursing yourself, it limits tax liabilities and this move will shrink the amount you can claim and potentially reduce the amount you can take home as a result.

How will the National Living Wage affect recruitment agencies?

For recruitment agencies, the arrival of the National Living Wage will potentially impact their business in two ways. Someone will have to pick up the burden of this pay rise and that could impact heavily on margins if employers are unwilling to agree to a change in rates. Similarly, the added burden may prevent some businesses from recruiting, hitting overall agency activity and profitability.

Recruitment agencies need to speak to end users and educate them about the Living Wage. They also need to look closely at how they charge and consider how to increase rates to offset the impact. Critically, agencies must also look closely at their supply chain and the options available for managing the changes.

There are multiple options so make sure you have the best possible partners for managing payments and make sure you are operating in the most efficient way.

How will the arrival of the National Living Wage change things?

The arrival of the National Living Wage has happened reasonably quietly but that’s because it has been lost in the noise surrounding the controversial expenses restrictions. There will be varying impacts on every level of the self-employment and contractor sector and agencies and freelance workers alike need to make sure they and their suppliers are compliant.

For those who work with Danbro, they will see some small changes but we will manage those for them and most will see little difference. In some cases we will obviously work more closely with people to make sure they are operating efficiently.

What is important is that this change is communicated properly to everyone involved, from employers through to workers, and that will be especially important for agencies who need to make themselves aware of the issues, check their supply chain and educate all of their end users ahead of the pay hike next month.

If you have any questions around Living Wage, contact Danbro and we will be more than happy to help.
Blog written by
Helen Broughton MBE

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