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In a change of approach, the government has told the Low Pay Commission to take the cost of living into account when setting the next national living wage increase
This will be the first time the cost of living has been used as a lever when setting rates for the national living wage.
The Low Pay Commission (LPC) will give the government recommendations on the proposed rise for 2025-26 in October with the increase coming into force from April 2025.
Business secretary Jonathan Reynolds said: ‘The new remit to the LPC is the first of many vital steps we will take to support more people to stay in work and improve living standards.
‘Our focus remains on putting more money in working people’s pockets and boosting economic growth.’
In addition to the cost of living, the LPC will continue to take into account the impact on business, competitiveness, the labour market and the wider economy.
The government is also going ahead with plans to align rates across different age groups.
Deputy prime minister Angela Rayner has written to Baroness Stroud, chair of the LPC, stating: ‘The government is committed to ensuring that every adult worker benefits from this genuine living wage, and we will remove discriminatory age bands for adults.
‘In the interim, we ask that the Low Pay Commission recommends a national minimum wage rate that should apply to 18 to 20-year-olds from April 2025.
‘This should continue to narrow the gap with the national living wage, taking steps year by year in order to achieve a single adult rate.’
Currently, rates depend on how old an employee is, which means companies can reduce their wages bill by hiring a 16 to 20-year-old while those of that age should be able to find a part-time position relatively easily.
However, this is only set to change for 18 to 20-year-olds, bridging the gap in minimum wage between those that are 21 and over.
In April rates were increased across the board, with apprentices paid a minimum wage of £6.40 per hour, the same as 16 to 18-year-olds. Since 2021/22 this was an increase of £2.10 an hour for apprentices and under 18-year-olds.
From April, for the first time those aged 21 and over have been paid £11.44 an hour for the national living wage. Previously over 23-year-olds would earn a marginally better minimum wage.
Emma Jones, CEO of Enterprise Nation, said: ‘Small businesses are the backbone of our economy, and we know they are facing unprecedented pressures.
‘We want to create an environment where both businesses and workers can thrive and will continue to advocate for a balanced approach that will ensure the survival, growth and success of small enterprises.’
The move was welcomed by trade unions.
TUC general secretary Paul Nowak said: ‘Hard work should pay for everyone. These are significant first steps towards making the minimum wage a real living wage and will make a difference to millions.
‘The government are right to ask the Low Pay Commission to be more ambitious next year and into the future.
‘It is not right that young workers are paid less for doing the same job as older colleagues.’
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