Employment costs are leaving thousands of small firms struggling to remain viable, business groups have warned

Employment costs are leaving thousands of small firms struggling to remain viable, business groups have warned

Labour's above-inflation minimum wage rises and employment cost hikes are leaving many small business owners unable to pay themselves a living wage.

The Federation of Small Businesses (FSB) said thousands of owners are being pushed into a cycle of rising costs and shrinking profits, forcing them to absorb higher wage bills and compliance costs.

The organisation told the Low Pay Commission (LPC) that rising employment costs were becoming a "structural" feature of the economy.

They also warned that increasing numbers of owners were closing their businesses, or making decisions that could damage their long-term financial security.

Its submission said: "Employment costs – including the national living wage, employer National Insurance contributions and auto-enrolment – are making it increasingly difficult for small business owners to generate enough profit to pay themselves a living wage, let alone save for a pension.

"The result is fewer sustainable roles and fewer viable small firms."

Only 11 per cent of FSB members said they would be unaffected by another above-inflation increase to the minimum wage, according to the organisation.

The national living wage currently stands at £12.71 an hour for workers aged 21 and over, while employees aged 18 to 20 must be paid at least £10.85 an hour.

In March, the LPC indicated it was considering an increase of up to five per cent for 2027, with a central estimate of £13.18 an hour, representing a 3.7 per cent rise that would remain above expected inflation.

The Institute of Directors (IoD) has also urged the LPC to advise Labour to reconsider its manifesto pledge to equalise minimum wage rates across all age groups.

It argued that recent increases to youth minimum wage rates had contributed to a sharp rise in youth unemployment by discouraging employers from recruiting less experienced workers.

They said: "If the Government wants to tackle the youth employment crisis, it must address the cost pressures associated with hiring young people."

The IoD added that abolishing lower youth rates risked worsening the problem and called for further increases to be paused until youth employment returns to pre-pandemic levels.

Youth minimum wage rates have risen by more than 25 per cent under Labour.

It's a change that economists, including policymakers at the Bank of England, have said has intensified youth unemployment.

A survey by the Recruitment and Employment Confederation (REC) found one in four employers would reduce hiring if the minimum wage increased to the levels currently under consideration.

They suggested businesses were approaching a "tipping point" in recruitment decisions.

The REC said entry-level roles were being cut, working hours reduced and the impact was falling disproportionately on young people and new labour market entrants, particularly those at risk of becoming or remaining NEET.

The IoD also called on Labour to abandon its scheme offering employers up to £3,000 to recruit young people who are out of work.

They argued that one-off incentives combined with significant bureaucracy would not offset wider increases in employment costs.

A Government spokesman said Labour's increases to the minimum wage and national living wage had left the lowest-paid workers £900 a year better off.