The National Living Wage (NLW)

13 July 2015

As announced in the Summer Budget, from April 2016 there will be a new National Living Wage (NLW) for workers aged 25 and above, by introducing a new premium on top of the National Minimum Wage.

From April 2016, the new NLW will be set at £7.20 – a rise of 70p relative to the current NMW rate, and 50p above the NMW increase coming into effect in October 2015.

This means that employers will have two pay increases to implement in the next year for any employees aged 25 and over. The first on 1 October 2015 where the adult NMW rate will increase to £6.70, and then again in April 2016 where the NLW rate will increase to £7.20.

The government will ask the Low Pay Commission (LPC) to set out how the new NLW will reach 60% of median earnings by 2020 which based on earnings forecasts, this means that the NLW will reach the government’s target of over £9 by 2020. The 60% of median earnings is apparently in line with the approach suggested by Professor Sir George Bain, the first chair of the LPC, in a 2014 report on the future on the NMW.

The Office for Budget Responsibility (OBR) has indicated that knock-on effects further up the wage distribution could mean a further 3.25 million people also see an increase in wages as a result of the NLW. By the end of the Parliament, an individual aged over 25 working 35 hours a week and previously earning the NMW will see their gross wages increase by around a third compared to 2015-16, or £5,200 in cash terms. This is equivalent to an extra £2,000 per year from the premium alone, £4,000 for a couple.

Alongside the Budget, the government has published an entirely new remit for the LPC. To ensure that the rate of the NLW is set at a sustainable level and continues to take account of broader economic conditions, the LPC’s remit will require it to set the NLW in a way that reflects the growth in median earnings. The LPC’s remit in relation to the NMW will remain unchanged.

For younger workers, the priority is to secure work and gain experience, which is already reflected in the existing NMW rate structure. In order to maximise the opportunities for younger workers to gain that experience, the NLW will only apply to workers aged 25 and over. The wages of younger workers will continue to be underpinned by the core NMW.

The government recognises that this new NLW may increase costs for some businesses. Therefore on top of other reductions in business tax, from April 2016, the government will increase the National Insurance contributions (NICs) Employment Allowance from £2,000 to £3,000 a year. The further reduction in the rate of corporation tax will also cut costs for businesses, as will reforms to the Annual Investment Allowance

The OBR estimate that the increased cost to businesses from the NLW could amount to only just over 1% of corporate profits by 2020. It will be interesting to see if this is actually the case.