Summer Budget: compulsory 'National Living Wage' to be introduced for UK workers over 25

Out-Law News | 08 Jul 2015 | 5:41 pm | 2 min. read

Businesses will be required to pay all workers  aged 25 and over a new 'National Living Wage' (NLW) of £7.20 an hour from April 2016, rising to £9.00 per hour from 2020, the UK government has announced.

The new rate will be introduced by way of a premium on top of the existing National Minimum Wage (NMW) for employees aged 25 and over, according to the Government's summer Budget report. The National Living Wage therefore essentially replaces the NMW for those aged over 25 and the NMW will continue to  set minimum pay levels for younger workers.

Chancellor George Osborne said that the cost to businesses of providing higher wages would be offset through the planned corporation tax reduction and an increase in the 'employment allowance' against employer National Insurance Contributions (NICs).

The independent Office for Budget Responsibility (OBR), which scrutinises the likely impact of government policy on the economy and public finances, has said that the new policy will have only a "fractional" effect on jobs, Osborne said in his Summer Budget speech.

"[The OBR says] that by 2020 there will be 60,000 fewer jobs as a result of the National Living Wage but almost one million more in total," he said. "They also estimate that the cost to business will amount to just 1% of corporate profits."

"It can't be right that we go on asking taxpayers to subsidise, through the tax credit system, the businesses who pay the lowest wages. That subsidised low pay contributes to our productivity problem," he said.

One in five UK workers is "low paid" as defined by the multinational Organisation for Economic Cooperation and Development (OECD), compared to an average of only one in six across the OECD as a whole. The NLW, which will be overseen by the Low Pay Commission, is intended to address this deficit and will directly increase the wages of approximately 2.7 million low wage workers, according to analysis set out in the Summer Budget document.

The Low Pay Commission will make recommendations for future increases to the NLW "in a way that reflects the growth in median earnings", with the intention that the NLW will reach 60% of median earnings by 2020, the government said. Recommended increases to the NMW will continue to be based on existing objectives of enabling younger workers to secure work and gain experience, according to the document.

From April 2016, the 'employment allowance' which allows every UK business to save on employer NICs will be increased from £2,000 to £3,000. Osborne said that this increase would enable every firm to "employ four people full time on the new National Living Wage and pay no national insurance at all".

Further corporation tax reductions announced by the government will reduce the rate paid by businesses from 20% to 19% from April 2017, and from 19% to 18% from April 2020. The previous government steadily reduced the UK's main rate of corporation tax from 28% when it came into power in 2010 to the current 20%.