The national living wage will rise to two-thirds of average earnings, according to a speech by chancellor Jeremy Hunt.
At the Conservative Party conference today (October 2), Hunt said the national living wage - currently £10.42 an hour - is set to go up to at least £11.00 an hour.
As a way to boost income for the lowest paid, the chancellor committed to accept the low pay commission’s recommendations - which will be announced in November.
Based on the low pay commission’s latest forecasts, this would see the national living wage increase to over £11 an hour from April 2024 and would mean the annual earnings of a full-time worker on this will increase by over £1,000 next year.
People currently aged 23 and over are eligible for the national living wage, with over 2mn workers on low pay set to benefit from the increase.
The announcement, after successive rises since its introduction in July 2015, means a full-time worker will be over £9,000 better off than they would have been in 2010.
Kate Smith, head of pensions at Aegon, said this news will be welcomed by all UK low earners as it means putting more money in their pockets at a time when the cost of living remains high.
“The increase could even be higher once the low pay commission recommendation is known.
“This means that those on the NLW will see an increase of at least 5.56 per cent. This is lower than the most recent increases in national average earnings of 8.5 per cent and CPI of 6.3 per cent.”
Smith said this is good news for pension saving too, as it enables more employees to build up larger pension pots, as pension contributions tend to be a percentage of how much someone earns.
“A hidden benefit of the increase in living wage is that more people will also benefit from higher employer pension contributions and bring more people into the scope of auto-enrolment,” she said.
“Currently, eligible employees working full-time on the NLW of £10.42 (£18,964.40 pa) will benefit from a total pension contribution of £1,018 per year from their own and their employer’s pension contributions.
“With a NLW of £11 an hour (£20,020 pa) this increases to at least £1,102 from April with the rise in the living wage, meaning they will have an additional £84 going into their pension over the course of the year.”
Smith said while this might not seem a lot, even a small increase today, with compound investment growth over many years, will prove very beneficial to future retirement savings, especially for those just starting out in their careers.
Currently, auto-enrolment is currently limited to those aged 22 and above and is due to be extended to all over 18s provided they meet the £10,000 a year earnings trigger.
The national living wage only applies to those aged 23 and over.
“We are hoping that the chancellor will also announce similar rate increases to the national minimum wage for under 23s to enable them to also benefit from an employer pension contribution,” she said.
Frozen tax
However, frozen tax thresholds mean almost a third of this rise will be eaten by tax, according to Hargreaves Lansdown.
For someone working 37 hours a week, after tax the income will only be up 4.3 per cent which may well be less than inflation.
Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “Tax is set to swallow almost a third of the minimum wage rise, which could turn a pay rise into an effective pay cut.
“Jeremy Hunt announced a rise in the minimum wage – the tastier component in his carrot and stick combination to convert benefits claimants into employees.
“But while it sounds like it could be an inflation-busting rise, once you take tax into consideration, it’s far less notable.”
Coles said it's too soon to tell where inflation will be in April next year.
The government has pledged inflation will reach 5.05 per cent by the end of the year, so there’s a chance the rise in the minimum wage will beat this.
“If you work 37 hours a week, it means an effective pay rise of £1,116, of which almost a third will disappear in tax. Your take home pay would be £18,414 - up from £17,655, which means it would have risen 4.3 per cent. This could push the wage rise back below the inflation rate,” she said.
“It demonstrates the devastating impact of the frozen income tax thresholds on our incomes.
“The fact that the threshold isn’t rising with inflation ensures that the taxman will always take a bigger chunk of any pay rise, especially where you cross over the threshold into a new tax rate.”
Hunt also announced plans to make it more difficult to claim working age benefits and public sector reform to cut costs – starting with cuts to the civil service.
He said he would tighten the law so that nobody should have their bank account closed because of their political views.
“It’s going to be interesting to see what form this takes given that this is already outlawed through the Payment Accounts Regulations and an FCA investigation found that no bank had removed an account from someone for their political views in the year to June 2023,” Coles added.
sonia.rach@ft.com
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