THE latest increase in the National Living Wage has taken a heavy toll on the profitability of small businesses and resulted in firms cutting investment and jobs, research has shown.

In a survey by the Federation of Small Businesses around two thirds of respondents said they had accepted a cut in profits following the increase in the standard hourly rate to £7.50 in April, from £7.20.

The findings underline the impact of the increase in the rate on the key small business sector amid uncertain times for the economy and raise big questions about a flagship policy.

They suggest the change may have had a range of unintended harmful consequences.

Around a quarter of small businesses questioned said they had cancelled or scaled down their investment plans following the increase.

With a fifth hiring fewer workers and one in 20 laying off staff in response, the wage rise may be having a damaging effect on the labour market.

Small and medium sized enterprises account for around 55 per cent of private sector employment in Scotland.

The FSB found a fifth of firms had reduced staff hours.

The rise does not seem to have boosted demand for younger workers who are on a lower rate.

As 39 per cent of respondents said they had increased prices since April the increase could also be helping to stoke inflation. This has been on the rise since the pound fell in the wake of the Brexit vote.

The FSB said small firms’ operating costs have surged to their highest levels in four years.

The results of the living wage survey in Scotland were in line with the UK.

However, the findings may stoke concern about the impact of the increase on sectors that play a particularly important part in the Scottish economy, such as tourism and leisure.

The federation said the sectors facing the greatest squeeze are those with tight margins where wages are typically lower. It cited retail, care and hospitality and accommodation businesses.

Colin Borland’s, FSB’s head spokesman in Scotland, said: “It is perhaps unsurprising that shops and restaurants feel more pressure from increases to the national living wage, than say IT contractors or lawyers. Many operators in Scotland’s large hospitality industry will have had to carefully examine the books to make these increases work.”

Mr Borland said the Government needed to recognise the problems caused by the wage rate change and should provide help for small firms.

He noted: “Between rising energy costs, shaky consumer confidence and the impact of Sterling’s depreciation on supply chains, many of our members are having to make tough decisions about pricing, investment and growth. An expansion to the employment allowance at the Autumn Budget would give many of Scottish small employers much needed breathing space.”

The employment allowance provides relief of up to £3,000 a year against National Insurance costs. The FSB wants it focused on the smallest employers.

The federation has suggested the Government’s target for the NLW to rise to £8.75p per hour by 2020 should be delayed if economic conditions do not justify it. The rate should not increase above £7.85 per hour next year.

Its chairman, Mike Cherry, said: “It’s vital that the NLW is set at a level that the economy can afford, without job losses or harming job creation.”

The federation said less than four per cent of small businesses responded to the NLW increase by hiring more workers under the age of 25, who are due £4.05 to £7.05 per hour depending on their ages. Apprentices are due £3.50 per hour.

It said the majority of small businesses are already paying their staff above the new NLW. Some 43 per cent of small firms have had to increase their wages in line with the official standard.