The National Living Wage (NLW) will rise from £11.44 to £12.21 an hour from 1 April 2025, chancellor Rachel Reeves confirmed last night ahead of her Budget speech today.
It means that pay will increase by 6.7 percent for around 3 million workers aged 21 and over from next year, which the treasury said amounts to £1,400 extra a year for someone working full time.
Younger workers will also see their hourly pay levels increase as Reeves said the National Minimum Wage (NMW) for 18 to 20-year-olds will rise from £8.60 to £10.00 an hour, representing the biggest recorded rise for this pay band.
The NMW increase of £1.40 will swell pay packets by £2,500 next year for younger people.
Steve Herbert, reward and benefits consultant, said: “Few would argue that an uplift to the low paid will be very welcome by those in receipt of it, but the challenge is that employers – particularly the SME community where this has a bigger impact – have not seen the returns over the turbulent 2020s to support a 40 percent increase in staff costs over that same period of time.
“Add to this the possibility of NI increases, greater employment rights, pay differentials up the scale, and other economic challenges and this could be a real brake on the growth that the UK so badly needs.”
In the chancellor’s Budget speech today, Reeves is expected to unveil increases in the amount of national insurance that employers pay. The government has repeatedly said that NI rises will not be seen in the payslips of working people.
However, on Monday, Julia Turney, partner, platform and benefits, at Barnett Waddingham, said there was “an overall concern” about rising employer costs leading to reductions or cuts in benefits such as pension contributions.
She said the cost rises could hit budgets for employee benefits such as pension contributions, healthcare and life assurance meaning “employees could be left to pick up the pieces”.
Baroness Philippa Stroud, chair of the Low Pay Commission, acknowledged the challenge for employers, saying: “The government has been clear about their ambitions for the NMW and its importance in supporting workers’ living standards. At the same time, employers have had to deal with the adult rate rising over 20 percent in two years, and the challenges that has created alongside other pressures to their cost base.”
She added: “It is our job to balance these considerations, ensuring the NLW provides a fair wage for the lowest-paid workers while taking account of economic factors. These rates secure a real-terms pay increase for the lowest-paid workers. Young workers will see substantial increases in their pay floor, making up some of the ground lost against the adult rate over time.”
‘Hidden’ pension benefits
Kate Smith, head of pensions at Aegon, pointed to a “hidden pension benefit” from upping the NLW as it will “have a positive impact on pension contributions, enabling employees to build up larger pension pots”, she said.
“An increase to £12.21 an hour (£22,222 pa based on a 35 hour working week) means employees on the NLW who are auto-enrolled into a workplace pension will benefit from a total annual pension contribution of £1,278 a year, made up of their own and their employer’s pension contributions, meaning an additional £112 going into their pension over the course of a year.”
Long term wage plans
Rises in the NMW and NLW mark the first step in government efforts to align the two to ultimately create a single adult wage rate.
Smith said: “The minimum wage for under 20s and apprentices remains lower than the new NLW but in percentage terms, their increases from next April are even larger. People aged 18 to 20 will receive a 16.3 percent increase to £10 an hour. Workers aged 16 to 17 and those receiving the apprentice rate get the greatest percentage uplift of 18 percent taking them to £7.55 an hour. These uplifts reflect the government’s aim to equalise the minima for all adults regardless of their age.
“Longer term, the government is also considering opening up auto enrolment to employees aged under 22, who are currently excluded from pension saving. These increases in minimum wages make this even more pressing as currently, under 22 year olds are missing out on what would be a valuable employer pension contribution.”
However Smith said: “While welcome, the new minimum living wage still falls short of the real Living Wage which many employers have signed up to, at currently £13.85 an hour in London and £12.60 an hour for the rest of the UK.”
However, Reeves stated: “This government promised a genuine living wage for working people. This pay boost for millions of workers is a significant step towards delivering on that promise.”
Deputy prime minister Angela Rayner said: “Our changes will see a pay boost that will help millions of lower earners to cover the essentials as well as providing the biggest increase for 18 to 20 year olds on record.
“The minimum hourly wage for an apprentice is also boosted next year, with an 18 year old apprentice in an industry like construction seeing their minimum hourly pay increase by 18 percent, a pay bump from £6.40 to £7.55 an hour.
“These increases will mean 3.5 million workers will receive a pay rise this year in total. They confirm the Low Pay Commission’s recommendations, whose advisory remit was overhauled by ministers in July to consider the cost of living.”
Lush Cosmetics ethics director Hilary Jones said: “Lush staff making and selling our products are crucial to our success, so we commit to the Living Wage Foundation’s independently calculated real living wage rates each year to feel confident our rates of pay are fair and that our staff can afford what they need to thrive, not just survive. In these tough times where the cost of living continues to rise, it is great to see the government increase minimum wage closer to these calculations to support the hardest working and most vulnerable workers across the UK.”
