For millions of workers in the UK, the National Living Wage (NLW) increase to £12.21 per hour in April 2025 is a long-awaited boost to their earnings. Over the past decade, the NLW has steadily risen from £7.20 per hour in 2016, helping to lift low-paid workers out of financial hardship and providing greater economic security. However, while this increase is a cause for celebration for employees, businesses of all sizes across the country are bracing themselves for the financial impact of this combined with the rise to employer National Insurance contributions.

A Win for Workers

For the millions of employees currently on the National Living Wage, the 2025 rise is more than just a number on their paychecks. It's a life-changing boost that will enable them to better cope with rising costs, afford essentials, and improve their overall quality of life. Studies have shown that wage increases can significantly boost employee satisfaction, lower turnover, and enhance workplace morale. Workers in industries like retail, hospitality, and care will see some of the most significant benefits, further reinforcing the positive impact of this increase on workers.

The Small Business Struggle

While workers welcome the increase, it's important to understand the tough financial decisions that small businesses are facing. Unlike large corporations, which can more efficiently absorb rising costs, small enterprises must find ways to balance their books without harming their operations. Businesses with many low-paid workers, such as independent cafes, shops, and trades, are particularly vulnerable. This financial strain is a reality that many small business owners are currently grappling with, and it's crucial to acknowledge the challenges they are up against.

Some businesses have already begun responding in different ways:

  • New Look: The fashion retailer is accelerating the closure of approximately 90 of its 364 stores, leading to significant job losses. This move responds to increased employer National Insurance contributions and the planned rise in the National Living Wage.
  • Boots: The pharmacy chain plans to close around 300 stores in 2025, following a strategy initiated in 2023 to reduce its UK outlets. This restructuring aims to save over £600 million amidst rising operational costs.
  • Marks & Spencer has announced a 5% pay rise for its store workers, bringing wages up to £12.60 per hour. This has pressured competitors to follow suit.
  • Other retailers, such as Sainsbury’s and Costa Coffee, have increased wages, passing higher costs onto consumers through price adjustments.
  • Small business owners, however, lack the pricing power of these larger firms, meaning they often have to absorb the increased wage costs or cut back on staffing levels.

This is not a nice thing for a business; it can face significant penalties if it fails to pay its workers the National Living Wage (NLW) or National Minimum Wage (NMW). The enforcement process includes the following potential consequences:

  1. Penalty for Non-Compliance: If an employer is found to be paying less than the NLW, they must pay the arrears to the worker and a penalty. The penalty is 200% of the underpayment, up to a maximum of £20,000 per worker.
  2. Naming and Shaming: The government can also publicly "name and shame" employers who fail to pay the minimum wage. This means their business name will be published, which could damage their reputation.
  3. Legal Action: If an employer does not comply with payment orders, the workers can take legal action to recover the unpaid wages, and the government may pursue further penalties or legal proceedings.

How Can Small Businesses Adapt?

Strategic adaptation is key to surviving these wage increases for small businesses. Here are some essential steps they can take to navigate these changes successfully:

  1. Increase Productivity – Investing in employee training, technology, and streamlined operations can help businesses get more out of each hour worked.
  2. Review Pricing Models – A modest price increase, carefully balanced with customer expectations, can help offset rising wage costs.
  3. Cut Operational Costs – Reducing waste, renegotiating supplier contracts, and improving efficiency can help businesses stay profitable.
  4. Focus on Retention – Reducing employee turnover lowers recruitment and training costs, making managing wage increases easier.
  5. Explore Automation – Digital tools and automation, where feasible, can reduce reliance on labour-intensive tasks.

The Squeeze on Wage Differentiation

Another challenge is the narrowing pay gap between entry-level and experienced employees. With the minimum wage rising, workers who previously earned just above the NLW may feel undervalued, leading to pressure for further wage increases across all pay bands. This compression creates business tension, forcing them to rethink their pay structures and reward strategies to maintain fairness and motivation.

Conclusion

The 2025 National Living Wage increase is a double-edged sword. It provides much-needed financial relief for low-paid workers but also places significant financial strain on small businesses. As the UK’s economic landscape shifts due to these changes, small business owners must be proactive, adaptable, and strategic to navigate these changes successfully.

While larger companies may pass on costs to consumers, small businesses must find creative solutions to survive and thrive in an era of rising wages. How they respond will shape their future and the resilience of the UK’s small business sector.