Minimum wages and cost of employment

From the 1st April 2024, the UK minimum wage will increase from £10.42 to £11.44 - a massive 9.8% increase - far in excess of current inflation circa 4%.

I accept it is hard to live on the minimum wage however this increase is inflationary. It also means the Government doesnt have to stump the cash - employers do.

So lets look at the numbers and why the government wants to increase the minimum wage by so much - the answer is tax revenues of course....

How many people are on minimum wage in the UK?

The Low Pay Commission estimates there are about 1.6 million people on minimum wage. Although they have not provided any data, they suggest workers typically work 24 -30 hours per week.

Workers are entitled to 5.6 weeks statutory paid holiday per year (28 days).  This is pro rata for part-time work.

So let's work out an example.  Let's assume someone works 24 hours (3 days) per week and they work for 1 year. In one year they will have 156 paid days and actually work 139.2 days.   They will take home £14,277.12 per year with the new rate. With the old £10.42 rates they earnt £13,004.16 per year so their gross salary has gone up by £1,272.96 which the employer has to pay.

The 0% tax band in the UK is £12,570.

With the £10.42 rate, these workers had £434.16 which was in the 20% tax band (£86.83 tax due) and £43.42 of national insurance. With the increased rate, £1,707.12 now falls into the 20% tax band. So  the tax liability increases from £86.83 to £341.42 per year.  National insurance contributions increase from £43.42 to £170.71 (£127.30 increase).  Of the additional £1,272.96 additional pay resulting from this increase in minimum wage, they only receive £891.07- the government pockets £254.59 of tax and £170.71 in national insurance - 30% of the increase.  

 This means with 1.6 million low paid workers on minimum wage have added £611 million to the government coffers through taxation.

The situation for the employer is actually far worse as they have to pay the national insurance tax or a tax for the privilege of employing someone.

The employer national insurance thresholds have been held artificially low at £9,100.  Employers have to pay 13.8%  of salary as a tax for employing someone.

With the old £10.42 rate, £3,904.16 fell into the NI employer band at a rate of 13.8%, so employers had to pay the government £538.77 in tax for the privilege of employing someone.  With the new £11.44, this has increased to £714.44 (£175.67 increase).  The employee doesnt see the benefit of this - only the tax man. 

With 1.6M low paid workers that means yet another £281 million into the government coffers.

All told the increase in minimum wage will raise nearly an additional £1 Billion in taxes.

So what's the real cost to the employer per hour?

So the employee thinks they are on £11.44 per hour - not true.

Workers get paid holiday. Assuming these workers work 3 days per week (24 hours), they actually work 139.2 days per year but get paid for 156 days.  That means the effective hourly rate for actually working is not £11.44 but £12.82.  The employer also has to pay the employer national insurance for every hour, regardless whether worked, at 13.8%.  That pushes up the equivalent hourly rate to £14.59.

Employers also have to pay statutory pension contributions if the employee is paid more than £833 per month. The minimum contribution is 3% of salary. This means a £0.34 contribution with an hourly rate of £11.44 which when adjusted to cover days actually worked, this means it's really £0.38 per hour. So the real hourly cost for an employee is now £14.97 per hour. Employers will have to pay an additional £42.80 per year in pension contributions.

Let's consider a small convenience store open from 8am to 10pm.  The person on the till is on minimum wage and there's an additional person in store doing shelf stacking etc. There are multiple people staffing the store to get the coverage to be open 360 days per year.

The rent on the shop is £1,000 per month. This means 10,080 hours worked per year at an effective rate of £14.97 per hour. The wage bill is £150,897 per year.  

Assuming 30% gross margin on products sold, the shop needs a turnover of £542,000 (ignoring VAT) just to break even. The shop needs to sell an average of at least £100 of product per hour just to cover labour costs. Of course the shop will be way above the VAT registration threshold. Assume 50% of the sales are subject to VAT (food products are generally VAT exempt) - the tax man will want at least £50,000 per year from VAT which is added to the turnover needed. Coupled with the fact that shoplifting is dramatically increasing and prosecution rates are appallingly low, the real turnover of this little convenience store really needs to be more like £1M per year just to make a profit.

With the cost of living crisis and the high cost of food, it's easy to see why farmers are struggling - shops want to keep prices low in order to get the turnover - it means the price controls are passed onto farmers, who also have their own minimum wage challenges. They are being squeezed.

My conclusion is this increase will either push many small businesses into bankruptcy or there will be increased focus on reducing staffing costs eg capping hours so the salary is less than £833 per month, employing more under 21s or more robot self serve tills. Or alternatively prices in the shop will have to rise to compensate - ie the increase causes inflation.

Ultimately government needs to slim down.  With 51% of working people "working for the government" and 49% of actually creating value, then every private sector worker has to pay for a government worker.  Of the UK population (circa 70M)  only 33M people are working (of which only 16M work in the private sector - the rest work in some way for the government eg directly or through government contracts). Our 16M workers have to carry the rest of the 54M people making up the population.

Little surprise that the UK productivity per capita is one of the lowest in the developed world. 

Time to move to a low tax economy like Sweden I think !