The National Minimum Wage, the National Living Wage and the Living Wage – what are they?

In his Budget Statement yesterday afternoon, the Chancellor announced that from April 2016, the Government would introduce a National Living Wage for employees aged over 25. The main National Minimum Wage would also continue to be set. So what is going on?

What is the National Minimum Wage?

The National Minimum Wage is the minimum pay per hour that workers are entitled to by law. The National Minimum Wage rate depends on a worker’s age. The current rate is £6.50 for people aged 21 and over, £5.13 for those aged 18–20 and £3.79 for workers aged under 18. There is also a separate apprentice rate of £2.73 for apprentices aged 16–18 and those aged 19 who are in their first year.

The Low Pay Commission (LPC) offers recommendations to the Government on what the National Minimum Wage rate should be. Generally, these recommendations are based on what it believes the economy can bear without a significant adverse impact on employment. Each year the LPC makes its recommendations and the Government must then accept or reject these. The Government have said that the LPC will continue to recommend the National Minimum Wage rates in this way.

So if the National Minimum Wage is here to stay, what is the National Living Wage?

The big announcement in the first Budget of the 2015 Parliament was the introduction of the new National Living Wage for workers aged 25 and above. This would be set at £7.20 per hour from April 2016 and would exceed £9 per hour by 2020. However, the National Minimum Wage rate will still apply to workers aged under 25.

The National Minimum Wage will also play a role in the future setting of the income tax personal allowance. The Government has said it will legislate to ensure that once this tax-free allowance has reached £12,500, it will always be set to at least the equivalent of 30 hours a week on the National Minimum Wage. This means that people working up to 30 hours a week on the NMW would not pay Income Tax.

How will it work?

A Living Wage Premium will be introduced on top of the National Minimum Wage. This means that in April 2016 there will be a National Living Wage of £7.20 per hour. This will be 50p higher than the National Minimum Wage increase which will come into effect in October 2015.

The National Living Wage has been set at £7.20 as this was the minimum level of pay recommended by the Resolution Foundation review of the future of the minimum wage, which was chaired by the first Chair of the LPC, Sir George Bain.

The LPC has been given a new remit by the Government that will require it to set the National Living Wage in a way that will reflect future growth in median earnings. They have been asked to set out how the new National Living Wage will reach 60% of median earnings by 2020. This means that if earnings grow in line with the Office for Budget Responsibility (OBR) forecasts, the National Living Wage would reach the Government’s target of over £9 by 2020.

But isn’t there already a Living Wage?

Confusingly, the National Living Wage is not the same as the Living Wage.

The Living Wage is an unofficial rate that, as well as being higher than the current National Minimum Wage, is determined rather differently: while the National Minimum Wage rate a is “employer-focused”, based on what the labour market can bear without a significant adverse effect on employment, the Living Wage is “employee-focused”, based on the income necessary for employees to afford an acceptable standard of living. The acceptable standard of living is based on the Minimum Income Standard for the UK which asks members of the public what they think is enough money to live on, to maintain a socially acceptable quality of life.

The current Living Wage is £7.85 per hour outside of London and £9.15 per hour in London. The National Living Wage will still be below these rates when it is introduced next year.

Unlike the National Minimum Wage no legislation enforces the Living Wage and the Budget has not changed this.

What does all of this mean?

Essentially, this means many people across the country will be getting a pay rise but ultimately, this will lead to increased costs for some businesses. The Chancellor also announced an increase to the National Insurance Contributions (NICs) Employment Allowance to help businesses bear these costs. The Employment Allowance will allow businesses to forego the first £3,000 of NICs from April 2016. According to the Treasury, businesses could then employ 4 workers full time on the new National Living Wage from April 2016 without paying any NICs.

However, the OBR suggest that employers could also respond in other ways to offset a potential loss in profits:

  • Reduce the number of hours worked by employees
  • Reduce the number of people employed by firing people or by hiring fewer people
  • Changing the composition of their workforce by replacing people aged 25+ with younger workers
  • Increasing prices to pass over the cost of higher wages to customers

Aliyah Dar