Government plans to raise the minimum wage to the level of the living wage could cost private businesses £188m - and lead to some cutting jobs, reducing hours or even going to the wall.

An independent report commissioned by the minimum wage committee, leaked to Media Isle of Man, concludes that the island’s poorest families will see little benefit from the higher wages as they depend more on benefits and pensions income.

But it says government will be the big beneficiary, bringing in an extra £89m in tax, including £72m from the private sector.

In July 2021, Tynwald approved the recommendation of the poverty select committee that the ‘minimum wage should transition to the living wage within five years’.

But the government’s Island Plan subsequently set out a commitment to bring that goal forward by more than a year, to April 2025.

A report by consultants Pragmatix Advisory, commissioned by the minimum wage committee and funded by the Department for Enterprise, concludes, however, that would be moving too fast - and advises a longer period of transition.

It states: ‘Stakeholders agreed a policy of harmonising the minimum and living wage rates was the correct direction of travel.

‘Nobody we interviewed was opposed to the living wage, and all businesses said they would want to pay it when they were in a sound position to do so.

‘But given the current geo-political and economic uncertainties, on balance we believe that the risks of introducing such a large increase in the minimum wage now outweighs the potential benefits.’

The minimum wage hourly rate for adults rose from £10.75 to £11.45 from July 1, following interim recommendations by the minimum wage committee.

But the Isle of Man living wage for 2024-25 stands at £13.05 per hour, up from £12.01 per hour last year.

This is intended to reflect the minimum salary necessary for families to afford the basic opportunities, choices, goods, and services required for them to participate fully in society.

It should not be confused with the ‘national living wage’ that the UK government introduced in 2016 and is currently £11.44 per hour. This is actually just the minimum wage for workers aged 21-plus and is not calculated with any explicit reference to the cost of living.

The Pragmatix report considers the impact of harmonising the island’s minimum and living wages to an estimated £13.73 an hour next spring, an increase of just under 28%.

As part of its research, it interviewed business leaders and carried out a voluntary online survey of 31 businesses across 10 sectors.

The report notes that the impact on businesses of increasing the minimum wage will vary depending on how many lower paid staff they employ and how vulnerable they are to financial shock.

Certain sectors are at higher risk including nurseries, care homes, retail, hotels, restaurants, and the third sector, including charities.

The consultants estimate that a 27.7% rise in the minimum wage would push up the wages bill for higher risk sectors by around 8%. But in practice, employees are likely to increase many salaries above the minimum to maintain differentials between employees.

The impact to private and third sector businesses in the first year in terms of overall labour costs could run to £188m across the whole economy if differentials are maintained, the report finds.

Businesses could pass on some of the increase in staff costs to the customers through higher prices, it notes.

But some will respond to higher wage costs by reducing the number of people they employ or reducing the hours worked by their staff, or a combination of both.

What firms can’t pass on to customers through higher prices or offset by reducing their costs will have to come out of their profits, the report notes.

Profits in some sectors could be substantially damaged - tourist accommodation by a whopping 49%, catering by 29% and manufacturing and retail both by 27%, the report estimates.

Low margin businesses have limited room to manoeuvre financially - and a third of those who responded to the survey said they could see themselves stopping operations if the minimum wage was to increase.

While the hike may place an additional cost burden on employers, it should provide a boost to household incomes to the tune of £99m. But for most the increase to earnings will be modest and the poorest families will see little benefit, the reported finds.

And the boost to overall incomes will be partly offset - by some £33m - by reductions in hours worked and/or job losses. The impact of this will be felt more acutely be lower-income households who are more likely to work in vulnerable roles and in the higher risk sectors.

Meanwhile, government finances will see a net benefit, the report finds.

The public sector wage bill will rise by £41m but this will be more than offset by the extra £89m the exchequer will receive in national insurance and income tax.