Neil McDonnell: Small firms face costly hike in minimum wage

With inflation forecast at 5.25%, the 12.4% rise (13.9% including auto-enrolment) is the biggest adjustment in the national minimum wage since the great financial crash

For the public sector, large multinationals, and firms with pricing power, the minimum wake hike is an irrelevance. But for many others, typically services and small retailers, it will be quite damaging. 

The run-up to Budget 2024 saw the Government prioritise the expansion of fiscal giveaways to the greatest extent possible, while not writing them into recurrent expenditure. However ‘one-off’ energy credits and social welfare bonuses are likely to provoke similar payments in future budgets.

The tax package is minimal but welcome. The adjustment to the standard rate cut off to €42,000, along with the USC and tax credit adjustments, mean the average worker will be almost €700 per annum better off.

We are glad to see that the lower rate of USC was not removed, as it is the only tax paid by the lower paid. 

Our EU neighbours, with better levels of healthcare and social services, do not apologise for applying some level of taxation to almost all workers. Here, that is rejected by politicians as a failure of the tax system to be ‘progressive’.

The most expensive measure will not be paid for by the exchequer. The increase of 12.4% (13.9% including auto-enrolment) in the national minimum wage will be felt differently across the economy. With forecast inflation for this year of 5.25%, this is the biggest adjustment in the national minimum wage since the great financial crash. 

Isme chief executive, Neil McDonnell

For the public sector and the large multinationals, it is an irrelevance. For employers with pricing power, it is something they can pass through to customers, which will be inflationary. For others, it will be damaging.

Those businesses (typically services and small retailers) which cannot pass on the increase in labour costs will find their working capital dwindle to the point where they cease to be viable. The Government has announced measures to address this, which means taxpayers will be on the hook for a legally mandated pay rise some businesses cannot afford.

To tackle this, the Government has announced an aid package of €250m for 130,000 businesses based on their rates’ payments. This will not be available to some businesses operating from rented premises such as childcare facilities. Secondly, this support averages €1,923 per business, when the cost of the minimum wage increase and auto-enrolment next year will be €3,228 per employee at or near the minimum wage. It is unlikely to be sufficient to keep them going. We have
yet to see the detail on this package and await the finance bill.

We had hoped for substantial movement in the entrepreneurial tax package on the key employee engagement programme, the R&D tax credit, the employment investment incentive scheme, and the knowledge development box.

While there was an adjustment to capital gains tax for angel investors, there has been no reduction in the 33% rate, which is among the highest in the EU. While limits for the key employee engagement programme scheme have been doubled, it is the terms of the scheme which have meant it is effectively useless. This needs attention in the Finance Bill.

There is a scheme promising landlords (who stay in the market) an extra €600 in net income this year, rising to €1,000 in 2027. This is unlikely to prevent landlords from exiting the market.

• Neil McDonnell is the chief executive of Isme