Paying the price: Changes to pensions and wages

Richard Woodard

10 November 2015

From workplace pensions to the national living wage, the on-trade has been hit with big changes to its economic way of life recently. Richard Woodard examines the likely effects on your business – and finds out what you can do about them

If you’re a small business owner, that old line about the only two certainties in life being death and taxes needs some modification. As recent newspaper headlines will attest, you can add in new laws, rules and regulations governing the way you operate, how you treat your employees and the payment of taxes and National Insurance.

It’s a bit like the French wine industry. I recall one Bordeaux luminary telling me (without the merest hint of a smile, this was the Médoc after all) that there was far too much bureaucracy in the region, and he wanted to set up a committee to see what could be done about it.

Every government trumpets its unrivalled credentials on ‘cutting red tape’ for businesses, especially SMEs (small and medium-sized enterprises) – and every government ends up introducing new laws and changing existing ones to enforce its ‘business-friendly’ agenda.

With the undiluted Conservative administration freshly installed, this is a particularly ripe time for such activities. We’ve already got the introduction of workplace pensions; now we have the launch of a national living wage (NLW) and (theoretically by way of compensation) further phased reductions in Corporation Tax (see box, p.78 for more details).

Philosophically and politically, this is designed to reinforce the Conservative vision of a ‘high wage, low tax’ economy, driving up pay for millions of people who currently earn the minimum wage or just above it. Many of these people also receive tax credits to supplement their meagre incomes, which weigh on the welfare budget and are (partly) paid for by companies’ tax contributions.

Osborne’s idea is that, if you shift pay upwards, then welfare budget will be cut (because tax credit payments will fall) and you can afford to tax businesses at a lower rate. Hence the gradual fall in Corporation Tax from 20%
to 18% by 2020, when the NLW is due to hit £9/hour.

The reaction from the hospitality trade to this policy has been varied, with some positivity, much caution and more than a little outright hostility.

Most employers absorb the pressures via some combination of small increases in prices, a dip in profits and productivity gains’ Conor D


‘As an industry employing a large number of individuals earning more than national minimum wage and less than the proposed living wage, we have tried to have a constructive dialogue with HM Treasury on building towards the living wage without job losses,’ says Ufi Ibrahim, chief executive of the British Hospitality Association (BHA).

‘Despite the Chancellor trying to alleviate the pain with adjustments to Corporation Tax and employment allowances, these changes do not go far enough to reduce the impact on SMEs and mitigate potential job losses across the industry.’

A BHA spokesperson adds that, at the time of writing, the organisation was still gathering feedback from its members to make a formal report to the Low Pay Commission on the NLW. But the BHA’s early impression is that hospitality will be ‘severely impacted’ by the changes.

We can’t automatically put our prices up to be able to afford to put up salary to living wage, or businesses would close down

Stuart McCluskey

‘Everybody wants to pay their staff fair wages and to reward them financially, but 80% of hospitality businesses are SMEs, and they might already be stretched as it is,’ says the BHA spokesperson. ‘The number of people paid below NLW but above minimum wage – that proportion is quite high.’

Balancing exercise
To understand just how high, we need to turn to a study by the Resolution Foundation, an independent think tank that analyses living standards for low- to middle-income people. The crux of the report is that the introduction of the NLW will mean a wage bill increase of just 0.6% across all business – but it also acknowledges that the impact on hospitality (along with retail and support services) will be ‘significantly larger’.

Across these three industries, some 2.7m employees will get a pay rise as a result of the NLW, including almost half of all hospitality workers by 2020, where wage bill increases will be disproportionately high at 3.4%.

The report also analyses the ‘bite’ of the NLW – its value relative to typical hourly earnings. Using this formula, the
bite of the current minimum wage for hospitality is already very high at 93%, but that figure will rise to an apparently illogical 110% by 2020.

What this means is that more than half of all hospitality workers will be paid the NLW or lower. Lower? How is that possible? Simply because a high proportion of hospitality workers are less than 25 years old – and under-25s will be ineligible for the NLW.

What’s happening?
Workplace pensions are being phased in between now and 1 April 2017. Employees aged between 22 and State Pension age, and earning more than £10,000 a year, are automatically enrolled into a workplace scheme. Employees pay, employers pay and the government helps out with tax relief.However, enrolment is not automatic for employers, who must set up a scheme for their workers – and the Pensions Regulator reckons you should allow a year to jump through the various hoops involved in doing so. Corporation Tax is being cut from its current rate of 20%, to 19% in 2017, then 18% by 2020. This could soften the blow of NLW and workplace pension legislation – though the impact on individual businesses will vary.

A national living wage (NLW) is being introduced for working people over the age of 25. This is set at £7.20/hour from April 2016, rising to £9/hour by 2020. It remains well below the Living Wage Foundation’s current Living Wage for London employees at £9.15/hour.

‘The size of the increase in the new wage floor will certainly be challenging in sectors such as hospitality, retail and care,’ says Conor D’Arcy, policy analyst at the Resolution Foundation. ‘It’s not yet clear how employers will respond but, while some may opt to reduce hours or new hires, past experience tells us that most absorb the pressures via some combination of small increases in prices, a dip in profits and productivity gains.’

This is the nub of the issue – the impact on the ground of these changes. The sums aren’t necessarily straightforward, but the key is whether the cut in Corporation Tax will make up for the increase in wage bills.

Price increase?
If any one area of industry is vulnerable here, it’s hospitality – particularly when there are other pressures to take into account such as workplace pensions and, for late-night venues, increasing levies and licensing fees. Rating revaluations are also in the offing for some locations.

‘With the added pressure of increased pension contributions, there seems to always be something to put pressure on small businesses,’ says Stuart McCluskey, of The Bon Vivant, The Devil’s Advocate and El Cartel in Edinburgh.

‘We can’t automatically put our prices up to be able to afford to put up salary to living wage, or businesses would close down,’ he concludes.

For many, there is still doubt about the exact magnitude of the impact. ‘It’s hard to tell,’ says Will Beckett, co-owner of Hawksmoor and Foxlow. ‘One decision you can be sure lots of people will have a close eye on is whether the new living wage legislation is like the old minimum wage (where you could top up with service charge) or new minimum wage laws (where you can’t).

‘Of course our costs will go up – because, although the vast majority of people at Hawksmoor earn the living wage, which is higher than the national living wage that Osborne has introduced, or more, some of it comes from service charge – and then there are two choices: put your prices up to compensate, or don’t.

‘If you don’t,’ he continues, ‘then of course you’ll make less money. If you do, you run the risk of being less competitive and might get fewer customers.’

The net effect, according to the Association of Licensed Multiple Retailers (ALMR), is a threat to the recovery of the licensed hospitality sector just as vibrancy and dynamism are returning. Payroll costs have risen to 26.4% of turnover this year, 2.2% higher than last year and the highest figure since 2011. That share is only likely to rise with the introduction of the NLW.

Other options
It’s easy to be gloomy – and with good reason. But could the changes have a positive impact too? ‘You would have thought costs will go up, as may prices on menus, but I also imagine productivity will go up, fewer people will leave hospitality (especially if they get to keep service charge as well) and staff turnover will go down,’ says Beckett.

I also imagine productivity will go up, fewer people will leave hospitality and staff turnover will go down

Will Beckett

And yet even this positive slant is a partial one: if workers are being paid more, but losing out on tax credits, they may not be much better off in terms of disposable income; and, as discussed, the NLW doesn’t apply to under-25s – of whom there are plenty working in hospitality.

And so the industry will continue to lobby, both on an individual basis and through trade associations such as the BHA, ALMR, BBPA and FSB. But what measures should they actually be lobbying for?

Top of the list must be a reduction in VAT for hospitality (see feature, page 106). In the UK, this stands at 20%, almost twice the European average, and in stark contrast to an EU picture where 25 out of 27 countries have cut rates for hospitality.

The BHA and others are campaigning hard for a reduction to 5%, arguing that this would deliver a massive boost to wealth and job creation, especially among younger age groups.

Whether it will happen during this apparently endless era of austerity is open to question, along with the relaxation of migrant laws and quotas which might help the industry overcome labour shortages. But if not that, what?

‘How about this?’ suggests Beckett. ‘Ban service charge. Then restaurants would all have to charge an honest price,
pay people properly and the whole system would feel a bit more honest. A few companies in New York are about to try it unilaterally, which is incredibly brave, but I’d be more comfortable if it was regulated. I know, I know – that’ll never happen either…’

What should you do about it?

‘I think there are three questions you have to wrestle with, and I think you have to start doing it now,’ says Will Beckett, co-owner of Hawksmoor and Foxlow.

‘What are you going to do with wages – not just the least well-paid, but everyone’s wages? People expect to earn more than staff who are junior to them.

‘What are you going to do about service charge – what will you charge customers and how will you deal with the money that does come in?

‘What are you going to do about passing the extra costs on to customers? Do it? Don’t do it? Your decision whether or not to change your prices may make you more or less competitive.

‘You should also bear in mind that many of your suppliers may be experiencing similar issues, and there may be other price increases you haven’t immediately factored in.

‘If you haven’t worked out in the next few months what impact this will have on your business and how to deal with it, then you’re going to get left behind, I think.’

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