What you need to know about the new National Living Wage

What is it?

Chancellor George Osborne announced during his budget that a new National Living Wage (NLW) will be coming into force from April 2016, replacing the current National Minimum Wage (NMW). The NMW is currently £6.70 an hour, but the new NLW will start at £7.20 an hour, and Osborne has set out plans for yearly increases, up to £9 an hour for 2020.

Process

The new NLW will be changed and raised incrementally over the period of this parliament, with the first change taking place in April 2016. The NLW will increase the lowest hourly wage by 50p to £7.20 an hour. This increase is expected to benefit roughly 2.7 million workers on low wages.

 

Conditions

The NLW rate of £7.20 will only be paid to those who are over 25. Those individuals who are under 25 will receive different rates – £6.70 for those aged 21-24, £5.30 for those 18-20, £3.87 for those under 18, and £3.30 for apprentices. More information on these rates can be found on the government’s dedicated NMW/NLW site here.

The difference in rates between ages is supposed to allow younger workers a better chance of gaining experience and securing a job at the start of their working careers.

How will this Affect Jobs?

The Office for Budget Responsibility predicts that some businesses may find themselves negatively affected by these changes, being unable to cope with the increase in wage costs. As many as 60,000 jobs could be lost as a result of this. However, the government is aiming to create a million new jobs over the course of this parliament, greatly outweighing these losses.

What is Being done to help Firms Cope?

To help firms cope with this increase in costs, the government is pledging to reduce corporation tax. It is currently 20%, but is planned to be cut to 18% by 2020, the lowest rate in Europe. As well as this, smaller firms will be given help in the form of a new Employment Allowance rate which will increase to £3000, a rise of 50%.

Why is this Happening?

The government has given many reasons for this new legislation.

Compared to other advanced economies, workers in the UK are often paid a lower relative wage. It is hoped that the new NLW will balance out this discrepancy and help low paid workers enjoy a better standard of living.

It is also hoped that an increase in wages may help employee motivation, with employees putting their time to better use. This could result in an increase in productivity and therefore a business and an economy that is ultimately more cost-efficient. Firms may also find themselves having to invest more in order to cover the increased costs, potentially leading to expansion and competition.

However, for some workers the change may not be enough to cover cuts in benefits. Changes in legislation over the course of this parliament will dictate how beneficial the new NLW truly is for the country, as the increase in wages will have little impact if job creation is not strong.

 

References

http://www.telegraph.co.uk/finance/budget/11726884/National-Living-Wage-Six-things-you-must-know-after-todays-budget.html

https://www.gov.uk/national-minimum-wage-rates

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