Reward and Employee Benefits Association event highlights ‘trickle-up’ effect

The forthcoming introduction of a national living wage (NLW) will lead to larger-than-expected increases in payroll costs among British businesses, according to reward experts – and if coupled with an end to salary sacrifice schemes, could lead to a drastic rethink of the compensation and benefits landscape.

At the New Year lectures event held by the Reward & Employee Benefits Association (REBA) in London, expert speakers described the NLW as one of the most significant of a number of forthcoming government-led initiatives –including the apprentice levy and pension changes – that were causing uncertainty and threatening to significantly raise the cost of employment.

The NLW will be introduced at £7.20, but the government has suggested it will reach £9 by 2020. However, John Harding, a tax and reward partner at PwC, said that an analysis of numerous impact studies suggested it would stand at around £9.35 by that time. And projections of incremental cost rises between 2016 and 2020 suggest the overall payroll impact for the average organisation would be between six and seven times higher than the NLW, as it was set at 60 per cent of median earnings.

This would inevitably affect overall reward structures, said Harding, not least because of the knock-on effect on salary bandings: “More people will be involved in auto-enrolment, the amount of national insurance [businesses are paying] will increase and you’ll have a ‘trickle-up’ effect.

“I have a lot of clients who have office workers being paid £18-19k, and by 2020 someone working a 40-hour week in their factories will be earning close to that.”

White collar workers will demand pay rises under such circumstances, suggested Harding, who also pointed to issues around compliance. “Once you underpay [the NLW] by just £100 across your entire workforce, you will automatically be named and shamed. There’s a huge backlog of businesses about to be named and shamed around the national minimum wage and we expect this to grow.”

For John Chilman, group reward and pensions director at transport business FirstGroup, a potential end to salary sacrifice schemes could be equally disruptive. There is widespread speculation that the Treasury will seek to halt or curtail such schemes – used to reduce tax paid against pensions and other benefits – in March’s budget.

Chilman said such a move would cause a “massive challenge” for businesses, and would inevitably reduce the range and level of benefits they felt able to offer employees, given the likely increase in payroll taxes.

The event also saw the launch of a REBA survey of reward and benefit practitioners, which found that free home technology was an increasingly popular reward, while buying and selling holiday was on offer at more businesses than ever before.

Defined benefit pension schemes were forecast to decline by 16 per cent during 2016, but the number of employees participating in car ownership schemes will almost double.