Small firms expect to slow hiring and increase prices because of the new National Living Wage for over-25s, according to the Federation of Small Businesses.
A survey by the FSB has found that 38% of small employers expect the new National Living Wage of £7.20 an hour to negatively impact their business when it comes into force in April 2016. Just 6% of firms said the policy would have a positive impact on their business.
When asked to consider the projected rise in the National Living Wage to at least £9 an hour by 2020, over half (54%) said it will have a negative impact.
Of those businesses that said they will be negatively impacted, 52% said they would put off hiring new staff, while 50% said they will raise their prices when the new Living Wage is introduced.
In addition, 41% said they would cut staff hours, 31% would reduce staff numbers and 29% said they would cancel or postpone planned investments. Almost a third of businesses owners expected to absorb the cost through reduced profits (29%).
Businesses in the wholesale and retail sector, and those working in accommodation and food services, are most likely to say the National Living Wage will have a negative impact.
The FSB's latest Cost of Employment Index, which measures wage and non-wage costs for small businesses, found that the National Living Wage will cost an extra £5,900 a year from April 2016 for a small retail business with six full time staff aged 25 or over and earning the current adult minimum wage.
Annual labour costs for a business like this are approximately £127,700. After claiming the higher Employment Allowance (which is set to rise to £3,000 next year), these costs are set to rise to £133,600 in April 2016.
The FSB is cautioning policy-makers that although small business confidence has been strong in the past few years, its recent research shows a marked cooling in confidence since the Summer Budget. It says it is likely that the new Living Wage, as well as changes to the tax treatment of dividends, has contributed to this dip in confidence.
John Allan, FSB national chairman, said: "Over half of our members already pay their staff above the voluntary Living Wage, but those that don't are often operating in highly competitive sectors with very tight margins. Without improved productivity there is a real risk that higher enforced statutory wages will lead to fewer jobs being created, fewer hours for existing staff and, unfortunately in some cases, to job losses."