Many of us were left wondering quite what the Conservative Manifesto meant by "we will continue to encourage businesses and other organisations to pay [the living wage] whenever they can afford it". After this week’s Budget that is clearer, with the surprise announcement that a "Living Wage" will, effectively, replace the current level of national minimum wage for most workers, increasing to more than £9 per hour within 5 years.

Increased minimum pay 2015/16

Despite the headline announcement of a £9 hourly rate, the increase in rate will be incremental, not immediate. A ‘national living wage’ premium will be introduced on top of the national minimum wage for workers aged 25 and over, resulting in two rises in the next 12 months, as follows:

Click here to view table.

Further increases to follow

After next April, the Low Pay Commission (LPC), an independent body which makes annual recommendations as to the level at which the national minimum wage should be set, will continue this function by suggesting rates for both the level of premium and national minimum wage.

However, the government has made it clear that it intends the living wage (ie the NMW combined with the living wage premium) to reach 60% of median earnings by 2020, which should put it at in excess of £9 per hour.

Impact on employers

In the context of various tax and welfare adjustments, whether the financial implications for employers are entirely neutral is not clear but changes to the employment allowance are intended to ease the pending increase in salary burden.  The government has relied upon data which suggests such a rise will not have significant adverse effect upon jobs.

Comment

Whilst good news for workers, one question which this bold move raises is where LPC sits in all of this? The LPC conducts extensive research and consultation into the annual report it submits to government setting out its recommended level of national minimum wage. Whilst the Chancellor made express reference to the LPC taking responsibility for rises in future, there was no such reference to its participation in the fixing of the new figure. Instead, it appears the government has itself decided to introduce higher rates, bringing the national minimum wage closer to that called for by the Living Wage Foundation and somewhat tying the LPC’s hands.

One can't help thinking that, whilst a boost to earnings levels, if the government is not careful it could be viewed as undermining an independent, external advisory body, restricting its advice to how the government’s chosen rate can be achieved, rather than weighing up the benefits of the move against the potential costs.