Charities that deliver public service contracts face the "very real prospect of closure" unless the government amends public service contracts to take into account the new national living wage, charity leaders have warned.
The warning comes in a letter from a group of charity leaders to George Osborne, the Chancellor of the Exchequer, in advance of the comprehensive spending review expected on 25 November.
It says that the government should adjust existing public service contracts with charities to take into account the national living wage and related workplace pension costs.
The NLW, which is due to be introduced in April 2016, will increase the minimum wage to £7.20 per hour, rising to £9 by 2020.
The letter, signed by the heads of six charity umbrella bodies including the Charity Finance Group, Navca and the Institute of Fundraising, says that the move "poses a significant challenge for voluntary and community organisations that are currently delivering public service contracts".
It says that the Third Sector Research Centre estimates that the total cost to the voluntary sector of the change will be £500m, which will be higher once the subsequent increased cost of employers’ National Insurance and mandatory workplace pension contributions are factored in. An estimated 75,000 charity employees will be affected by the changes, the letter says.
"The increased cost associated with the NLW will be very challenging for voluntary organisations who deliver public services," it says.
"Without strategic investment in existing public service contracts, voluntary and community organisations face the very real prospect of closure with vital services for the most vulnerable in society being lost.
"The increased costs associated with the NLW will not only exacerbate the £4.6bn funding gap that the sector will experience by 2018 if current rates of income and service provision are maintained, but also the current ‘capacity crunch’ which is most keenly felt by those organisations in receipt of government funding."
The letter calls on the government to provide ring-fenced investment to cover the difference in cost between existing budgets allocated in public service contracts to cover staff wages and the increased costs in wages introduced by the NLW.
Other recommendations in the letter include the creation of a "community capital fund" to enable communities to take ownership of their assets and the establishment of "partnership hubs" to promote and create innovative solutions in the delivery of public services.