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The government has been urged to help firms by cutting red tape after it was revealed that the cost to employers of the new national living wage will be over £1 billion.

A government report said the estimated cost of £1.1 billion is made up of almost £700 million in direct cost to employers from raising wages to meet the new statutory minimum of £7.20 an hour for over 25-year-olds from next April, and £137.5 million in associated non-wage labour costs such as pension and National Insurance Contributions.

There will also be a “ripple effect” driven by businesses maintaining pay differentials, estimated to cost £59.5 million. There will also be £221 million indirect labour costs and £22.6 million transition costs.

The Institute of Directors said the cost of implementing the new hourly rate came on top of other additional costs to businesses.

Seamus Nevin, head of employment and skills policy at the IoD, said: “IoD members supported the introduction of the Chancellor’s living wage as part of a deal he made with business – lower taxes for higher wages.

“Worryingly, however, the Chancellor’s £1 billion living wage is not the only extra cost businesses have been hit with.

“A new payroll tax, in the form of the apprenticeship levy, will cost employers £12 billion over the course of the parliament, while the next tranche of pensions auto-enrolment will affect the very smallest businesses.

“This is not to mention a number of significant additional reporting requirements firms will have to comply with. The cumulative effect of these will be considerable, particularly for those medium-sized businesses that just meet the threshold for compliance.

“It is imperative that the government now comes good on its promise of less red tape, fewer regulatory hurdles and a lower rate of corporation tax to help employers absorb these additional costs and raise pay.”

The IoD said nine out of 10 of its members already pay the higher voluntary living wage rate to all their staff members.

A spokesman for the Department for Business, Innovation and Skills said: “The Government believes now is the time to move to a higher wage, lower tax, lower welfare society. We have set the aspiration that the national living wage reaches 60% of median earnings by 2020. The initial rate of £7.20 puts us on the pathway to this target.

“It is important that the impact of rises in the national minimum wage and the national living wage balances the need to provide a fair wage while not damaging business.

“We are introducing steps to mitigate the cost on business through increasing the Employer Allowance from £2,000 to £3,000 which will benefit up to 590,000 employers. We are also cutting corporation tax from 20% to 18% by the end of the Parliament which will benefit over a million firms, save businesses £6.6bn by 2021, and give the UK the lowest corporation tax in the G20.”

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