From April 1, 2024, businesses will operating in the UK will need to comply with the government's new national living wage increase which will see the figure right by almost 10%. How will finance teams need to react? The CFO's latest explains the basics.
As of April 1, 2024, the UK government has implemented a significant increase to the national living wage to £11.44 an hour for workers aged 21 and over, up from £10.42 previously.
This 9.8% raise extends the living wage to a broader pool of younger employees as well. According to the government’s estimates, a full-time minimum wage worker will now earn £1,800 more annually, while a 21-year-old newly qualifying for the higher living wage rate will see a £2,300 yearly pay bump.
For corporate financial teams, properly incorporating this mandatory pay increase will require a multi-pronged approach touching on payroll, accounting, budgeting and workforce planning.
The first order of business is ensuring payroll systems and processes are updated to reflect the new higher living wage floor across different employee age bands.
Financial teams must work closely with HR to identify all affected workers and ensure their hourly rates are adjusted correctly starting April 1st. Payroll taxes, deductions, and required employer contributions may also be impacted and need reviewing.
Financial teams should obtain a report from HR listing all employees currently earning below the new £11.44 living wage threshold, along with their job titles, hourly rates, and typical hours worked. Cross-reference this against payroll records to validate the population impacted.
Work with the payroll provider or internal payroll team to code the new £11.44 rate into the payroll system, ensuring it takes effect for the first pay period starting on or after April 1st, 2024. Analyse whether payroll tax withholding tables, benefit deductions, or employer contribution amounts like pension/insurance need updating based on the new higher wages.
Conduct a parallel payroll run using the new rates and compare it to the previous payroll calculations to validate the financial impacts. Be prepared to book any additional compensation expense for retroactive payments owed if there are delays in updating payroll systems. Collaborate with HR on developing communications to impacted employees listing their new pay rates, any changes to deductions/contributions, and the effective date of the increase aligning with the living wage legislation.
On the accounting side, companies need to determine how to handle the wage increase’s P&L impact.
While some may book it as its own separate expense line item, others may roll it into existing compensation line items. In either case, elevated payroll costs require adjusting current and future expense projections as well as re-forecasting operating expenditures for this fiscal year and beyond.
The significant new labor cost increases may prompt some organizations to evaluate potential shifts in workforce strategy and budgets. Options could include further investment in automation and technology to reduce labor needs, outsourcing certain roles, or scaling back hiring plans. Any such moves would then flow through into updated budgets and hiring forecasts.
Alternatively, corporations worried about employee turnover and talent retention may choose to raise wages across more job bands beyond just minimum wage roles. Such broader compensation adjustments would significantly inflate projected people costs requiring budget adjustments.
It’s important to note that failing to pay the new mandated living wage is considered a criminal offense under UK law. HMRC actively identifies and fines non-compliant employers, so ensuring payroll adheres to the new standards is critical from a regulatory perspective.
From an internal change management lens, financial teams should develop robust communications to explain the new wage model’s rationale, which employees are impacted, and how the changes will be operationalized. Particularly for any employees experiencing wage compression, clear messaging is needed to guide organizational acceptance.
The increase to the statutory National Living Wage still trails inflation as well as the unofficial “Real Living Wage” calculated by the Living Wage Foundation charity at £13.15 in London and £12 elsewhere. As cost of living pressures potentially continue rising, businesses may face further mandated wage escalation down the line beyond 2024’s increase.
With strategic planning, process re-engineering, cost management, and close interdepartmental partnering, corporate financial teams can help their organizations navigate this latest regulatory wage shift effectively while protecting profitability and remaining compliant.
