Wage burdens pushing up risk of 'financial distress' for businesses

The combined number of retailers, wholesalers, transport and logistics firms and bars and restaurants in "financial distress" has increased by 23% since April, according to corporate recovery specialists Begbies Traynor. The firm said that it had seen a "strong link between rising levels of business distress and the implementation of the National Living Wage" at the beginning of April, according to the Financial Times, which published the data.

Separately, the Resolution Foundation has predicted a smaller than anticipated increase in the National Living Wage (NLW) next year, due to its link to median earnings and the impact of the Brexit vote. The think tank said that its predictions showed the "flexibility" of the policy, and answered criticisms from businesses that had argued the NLW should be scrapped in response to post-vote economic uncertainty.

"An increase [in the NLW] to around £7.50 will deliver a welcome annual pay rise of up to £600 for full-time staff," said Conor D'Arcy, a policy analyst at the Resolution Foundation.

"Though that's less than the £800 raise previously forecast, it's sensible that the size of the [NLW] rise adjusts in line with wages of typical workers. This flexibility means that calls from some businesses to scale back the NLW even further are wide of the mark," he said.

The NLW came into force in April, following a surprise announcement by then chancellor George Osborne at the 2015 Summer Budget. It was introduced at a rate of £7.20 for employees aged 25 and over as a premium on top of the National Minimum Wage (NMW), which continues to be paid to younger workers.

Increases to the NLW will be made in line with the recommendations of the independent Low Paid Commission, with the intention that the NLW will reach 60% of median earnings by 2020. It was originally projected to reach £9 per hour by this date. This is now unlikely, according to the Resolution Foundation; which is instead anticipating an increase to £8.60 by the end of the current parliament.

According to Begbies Traynor, the number of businesses employing lower-paid workers that are experiencing financial distress has increased from 78,917 in April to almost 100,000. The firm defines "financial distress" as the business having minor county court judgments filed against it or experiencing a sustained fall in working capital, retained profits or net worth.

Retail and manufacturing businesses are expected to be the worst affected by the impact of the Brexit vote in the short term, according to a recent industry survey. Of the over 400 attendees at the recent Restructuring and Insolvency Conference hosted by Pinsent Masons, the law firm behind Out-Law.com, 62% predicted an increase in business failures over the next 12 months.