The newly announced national living wage could place a substantial burden on charities that deliver public service contracts, social care providers in particular, charities have warned.
In today’s summer Budget, George Osborne, the Chancellor of the Exchequer, announced changes to the minimum wage, which is currently £6.50 an hour for those aged 21 and over. It will become the "national living wage" from April 2016 and be set at £7.20 an hour for those aged over 25, before rising to at least £9 an hour by 2020, said Osborne.
The government said that because the new NLW would increase costs for some employers, it would increase the national insurance contributions employment allowance – the amount that can be claimed back from an organisation’s NI bill – by £1,000 to £3,000 a year from April 2016. "This will help all businesses and charities, particularly smaller ones, with additional wage costs," the main Budget document says.
But there are concerns that this cost will be difficult to absorb for some charities.
Caron Bradshaw, chief executive of the Charity Finance Group, said: "The national living wage is to be welcomed, but it begs the question of whether the government will increase its payments to those providing public services. If not, this could seriously squeeze the budgets of those providing services to the most vulnerable in our society.
"We think it is unlikely that contracts and grants will be increased to make up for this. So, in effect, charities will have to find savings to pay for this within their existing budgets – a pretty difficult task."
Karl Wilding, director of public policy at the National Council for Voluntary Organisations, agreed.
He said it could be difficult for the government to expect charities to deliver more public contracts – on potentially much lower budgets – and at the same time pay staff more.
This would be particularly difficult for care charities, which account for a large proportion of the sector workforce, he said. "There’s no point undertaking a procurement activity that doesn’t take that into account," he said.
John Cridland, director-general of the business lobby group the CBI, said that a further reduction in corporation tax was "a welcome surprise", but added: "Tax reductions for employers don’t appear to match the businesses most affected by a rise to £7.20 in the national minimum wage next April – a 7 per cent increase. Small shops, hospitality firms and care providers are the businesses that will face real challenges in affording the national living wage."
Responding to Cridland’s comments about the lowering of corporation tax not offsetting the effect of NLW, Wilding said: "I’d still say that’s a decent bargain for businesses."
Wilding said the NCVO would be analysing data to assess the effect of the NLW in the coming days.
Andrew O’Brien, head of policy and public affairs at the CFG, said that the NCVO UK Civil Society Almanac 2014 showed that 25 per cent of the sector earned less than £7.78 an hour in 2011/12, and other data showed that a quarter of charity staff were working in social care, which tended to be a low-paid occupation.
The charity the Living Wage Foundation welcomed the news, but said in a statement on its website that it questioned why it was set below its own calculation that the living wage was £7.85, why it applied only to those aged 25 and over and why there was no higher rate in London.