The National Living Wage (NLW) is what used to be called the minimum wage for those over 25.  It’s the hourly pay rate that employers must pay as a minimum.  It tends to be the actual rate that’s paid to many, many people.  When it goes up, as it will in April, the gross pay of those people will increase, and the wage bill for employers will go up as well.

The government has announced that it is implementing the recommendations of the Low Pay Commission and that it will be the largest ever increase in NLW. For somebody on NLW who works 35 hours a week, the increase, they say, is £930 a year.

They are right, and I welcome it, but they are not telling the whole story. The whole story is a little messier.

It’s messier for the employee; it’s messier for the employer, and its messier for the government.

“Cui bono? (/kwiː ˈboʊnoʊ/), in English “to whom is it a benefit?”, is a Latin phrase about identifying crime suspects. It expresses the view that crimes are oftentimes committed to benefit their perpetrators, especially financially. Which party benefits may not be obvious, and there may be a scapegoat.” – Wikipedia

Before celebrating their windfall, someone working 35 hours a week on the NLW might want to take a closer look at the figures.

On the current rate of NLW for 2019 / 2020, they would have annual gross pay (over 52 weeks) of £14,942.20.

From April the new annual gross pay will be £15,870.40

An increase of £928.20.  So far, so good.

Those annual pay rates are over the personal allowance for tax and the threshold for National Insurance (NI); so tax and National Insurance has to be paid on the increase.

On the 2019 annual earnings, at current rates, that will be tax of £488.44 and NI of £757.22.

On the 2020 annual earnings figures, at the same current rates, that will be tax of £674.08 and NI of £868.61.

The net take home pay in 2019 is £13,696.54 and in 2020 will be £14,327.71.

So the gross increase of £928.02 becomes a net earnings increase of £631.17, still not to be sneezed at.

The NLW, though, is there to help low-paid workers. It’s not the only support that is meant to be available to them. Universal Credit is the, still new and much flawed, benefit which is also meant to help low-paid workers. Its proud boast is that you’re always better off in work, because you get to keep at least some of your earnings, if they increase.

Some.

Universal Credit is a means tested benefit and the higher your income, the lower the benefit. For earnings, it lets you keep 37% of any extra earnings that you have. That means the government will claw back 63% of those extra earnings.

That applies to the £631.17 extra that has come from the NLW. So someone working 35 week on NLW and claiming Universal Credit will see that £631.17 a year reduced to £233.53 in real terms because their benefit will be cut.

If they are getting Council Tax Reduction, then that will be cut as well although, as there are different rules across the country, and for every English local authority, the effect will vary from place to place but it may be substantial.

The result may be that the £930 a year, trumpeted by the government, may be nowhere near the £18 a week implied but more like £2 or £3 a week.

That’s pretty messy for the employee, what about the employer?

After all, they’re the ones who have to pay the £930, and quite possibly a bit more.

All employers have to pay the minimum wage and that includes people who often aren’t thought of as being employers. For example, a disabled person has to pay that to any carer that they have working for them, and those are often employed at NLW rates. That carer will have to pay their tax and NI, in the same way as any other employee.

Employers will have to find the extra £930 from their own resources. Employers are also liable to pay an employer contribution to NI, normally at 13.8% of the gross pay. To help small employers, there is an Employment Allowance so that the first £3000 of employer NI is not payable.

If you’re not a small employer, then of course it has to be paid.

Such an employer has to pay an extra £128 on top of the £930 increase in NLW.

Which brings us to the government, and their generosity in raising the NLW level in April. After all, it must be costing them a lot surely, given how proud they are of it?.

Let’s summarise the effects:

A non-small employer will pay an extra £1058 a year per full-time employee on NLW.

The employee will get, assuming, for example, a £100 a year reduction in their council tax support, £133 a year.

Where does the difference of £925 go?

Most of it to the government centrally; £186 in tax, £112 in employee’s NI, £128 in employer’s NI and £399 in reduced Universal Credit.  £825 in all.  The other £100 goes to the local council in reduced Council Tax Reduction entitlement.

The end result of this generosity of the government is that employers are going to have a substantial increase in costs for workers on NLW while the government, central or local, pockets about 88% of it, leaving the worker with, what might be considered, a pittance.

This doesn’t apply to all workers, of course, but it’s more than just the worst case, it’s a very common case.  There will be people who gain more, because they are not on Universal Credit or Council Tax Support. There are also people who will be affected more, for example people working part-time on the legacy Job Seekers Allowance will see all of the net increase taken away from them.

In summary though, if the government actually wanted to get more money to the lowest paid workers there are far more effective ways of doing it than by imposing what amounts to a stealth tax on employers.

Happy New Year / Blwyddyn Newydd Dda.

Addendum

I didn’t want to add too many other detailed points in this piece, but some people have made useful comments about things I’d omitted, or hadn’t thought about, so I’ll simply include:

• Employers and employees will have higher pension contributions.  Although this is long term beneficial for the employee, it will mean that the extra in their pocket from April is even lower.
• The Employment Allowance (EA) from April 2020  is going to be aimed solely at small employers, although even then they may not qualify because of  overall de minimis state aid rules,  Special rates for aid apply to the agriculture, fisheries and road transport sectors.
• Employers may have to pay a higher Apprenticeship Levy because their wages bill increases.
• It’s been suggested that workers who are paid more than NLW may seek wage rises as 6% for lower paid workers erodes differentials.

Please add any further examples or comments below.