Developing a 5 Year Strategy for the UK Salon Industry

National Minimum Wage (NMW) Increases.

The National Minimum Wage is projected to rise significantly by 2030, with the Low Pay Commission already signalling increases to align with living wage goals.

• Impact on Profit Margins: Labour costs, typically 50–60% of a salon's expenditure, could rise. Salons operating on thin margins may struggle without pricing strategy adjustments.
• Customer Pricing Sensitivity: Balancing service price increases while retaining customers will become a critical challenge.
• Target setting: Using standard multiple of pay calculations will no longer be achievable for many salons. Setting goals based on the price of services is one practical option. This alongside a shift in language to a Minimum Target Threshold and Optimum Target to define the sales income range per salary level.

Strategic Tip: Develop a pricing structure now that accounts for incremental wage increases. Increase prices in April to align with NMW. Review service offerings (removing less profitable services) and introduce tiered pricing to cater to diverse client segments and staff skill and experience levels.

Regulations on Apprenticeships.

The UK Government’s ongoing review of apprenticeships in the hair and beauty sector aims to address concerns about quality and wage fairness.

• Possible Changes:
  • Enhanced funding for apprenticeships to improve quality.
  • Stricter regulations on apprentice wages and working conditions.
  • Mandatory qualification timelines to ensure apprentices gain skills within defined periods.

Strategic Tip: Build partnerships with local training providers to ensure compliance and maintain a pipeline of skilled talent. Invest in structured training programs that balance learning with operational needs. Use training management software such as Loop HR to track skill development, financial investment and career progression.

For information on apprenticeship government funding speak with experts in this field such as Sarah Abel @sarahabelfundinggodmother

Regulation on Self-Employment

With the rising increase of "gig economy" models, regulatory scrutiny is intensifying around self-employed workers in salons.

• Expected Changes:
  • A clearer distinction between self-employed and employed roles, potentially leading to reclassification of some self-employed workers.
  • Increased accountability for ensuring tax and NI compliance among self-employed contractors.

Strategic Tip: Conduct a workforce audit to ensure compliance with new regulations. Where reclassification is necessary, either prepare to integrate previously self-employed workers into payroll systems – or modify your self-employed worker policies to align with local regulations.

Tax Implications: VAT and Beyond

Taxation remains a critical consideration for salon businesses, especially as the industry navigates rising costs and potential regulatory changes. A long standing topic of debate is the potential reduction of VAT for the hair and beauty sector, but currently there are no signs of any changes in policy.

VAT Rate Reduction

Despite significant backing from industry groups like the National Hair & Beauty Federation (NHBF) and the Salon Employers Association, which have called for a reduction in VAT rates from 20% to around 12%, the UK Government has consistently rejected these proposals. The Treasury has cited the complexities of unpicking the VAT system for specific sectors as the primary barrier to change.

Additionally, recent policy announcements, such as the increase in the VAT registration threshold from £85,000 to £90,000, suggest the Government’s focus remains on providing broader fiscal relief rather than sector-specific adjustments. As a result, salons should operate on the assumption that the standard 20% VAT rate will remain in place for the foreseeable future.

VAT Registration Threshold

Smaller salons operating below the VAT registration threshold will benefit from the recent increase to £90,000, effective April 2024. However, businesses nearing this threshold must plan for the financial and administrative impact of crossing it.

What impact will VAT have on my business? A business must increase revenue by £22,500 to breakeven without raising prices. Or add 20% to their prices, meaning the gross income would increase from £90,000 to £108,000 to cover the VAT.

Flat rate of VAT 13%.

The VAT Flat Rate Scheme offers salons a simplified method of VAT accounting by applying a fixed rate of 13% to their VAT-inclusive turnover. While it reduces administrative tasks and can provide financial benefits, salons should carefully evaluate their individual circumstances, considering factors like input VAT on purchases and overall turnover, to determine if the scheme is advantageous for their business.

Payroll Taxes and NI

The expected increases in National Minimum Wage will drive up payroll taxes and National Insurance contributions, further tightening profit margins for salons with employed staff. For an employee, there would be no change to their NIC’s.

Employer NICs: for an employee earning £24,000 per annum there will be an additional cost of about £784.20 per employee.

Tax on Apprenticeship Grants

Enhanced funding for apprenticeships may come with additional reporting and tax obligations, especially if Government schemes impose specific usage guidelines.

Strategic Tip: Work closely with a financial advisor to optimise your salon’s tax strategy. For smaller businesses, consider whether staying below the VAT threshold is viable or if pricing adjustments are necessary to absorb the costs. Larger salons should explore efficiencies in operations to maintain profitability under current tax obligations. By planning for the likelihood that VAT will remain at 20%, salons can focus on other cost-saving measures to remain competitive.
Finally, pricing and target setting are the two critical elements to get right to ensure profits. Use software such as Loop HR to set precise targets based on prices.