Government to introduce national living wage

Summer Budget 2015: A compulsory national living wage will come into effect from April 2016.

In his summer Budget, Chancellor George Osborne announced that workers aged 25 years old and over will receive £7.20 an hour. This is a 70p increase on the current national minimum wage and 50p higher than the national minimum wage due to come into effect in October 2015.

The government has asked the Low Pay Commission to set out how the new national living wage will reach 60% of median earnings by 2020. The aim is for the national living wage to reach at least £9 an hour by 2020.

According to Osborne, the introduction of the national living wage will directly boost the earnings of 2.7 million low wage workers, with the knock on effect expected to improve wages for a further 3.25 million people.

By the end of the current Parliament’s term, anyone over the age of 25 working 35 hours a week who previously earned the national minimum wage, will see their gross wages rise by approximately one-third compared to 2015-16.

The wages of workers under the age of 25 will continue to be underpinned by the national minimum wage.

In order to help offset the cost impact of the national living wage on employers, the government will raise the national insurance contributions employment allowance from £2,000 to £3,000 a year from April 2016. In addition, the corporation tax rate will fall to 19% by 2017 and 18% by 2020. 

Osborne said: ”From 2016, our new employment allowance, will now be increased by 50% to £3,000. That means [an organisation] will be able to employ four people full time on the new national living wage and pay no national insurance at all.

”And let’s be clear what it means for the low paid in our country. Two and a half million people will get a direct pay rise.”

Peter Boreham, principal in Mercer’s talent business, said: “Many companies with lower-paid staff are already considering how best to ensure how to deliver a living wage. There are concerns that the proposed approach limits flexibility since the minimum is likely to focus on base earnings and not include bonuses or profit sharing payments.

“While the move is broadly to be welcomed, the timing of this initiative is a little unhelpful. Companies have already absorbed increases to the previous minimum wage over the last 5-6 years that have noticeably exceeded median market increases for other staff. They have also suffered cost increases on the back of the recent ruling that holiday pay should include overtime, and the introduction of pension auto-enrolment.

”Whilst the corporation tax reduction will help to fund the change, it may not be sufficient for companies with a high proportion of lower paid staff.  Finally, there is a danger that this increase to fixed costs might damage employment if the economic environment becomes less benign or if competition from low wage economies and technology intensifies.”

Elizabeth Marshall, associate at law firm Kemp Little, added: “Whilst this is undoubtedly good news for employees, it will not be welcomed by small to medium-sized businesses or employers with a large workforce on low rates of pay, who will now need to find ways of meeting this unexpected (and potentially hefty) expense going forwards.” 

The national living wage is distinct from the living wage championed by the Living Wage Foundation, which is calculated based on basic living costs. At £7.85 an hour, this voluntary living wage is higher than the national living wage announced in the Budget. The current voluntary living wage for London is £9.15.