The Government’s announced that for pay periods starting  on or after 1st April 2020 the National Living Wage (NLW) will increase by 6.2% – four times the rate of inflation. The NLW (for over 25 year olds) will increase  from £8.21 to £8.72.

The Low Pay Commission estimate that nearly 3 million workers are set to benefit from the increases to the NLW and Minimum Wage rates for younger workers.

This is a rare and welcome case of a Government keeping its promises. The rise means Government is on track to meet its current target for the NLW to reach 60% of median earnings by 2020. With Britain pretty well at full-employment, it means that pressure on businesses to improve pay and conditions for those who historically have had little bargaining power, will increase.

The new rate will mean  an increase of £930 over the year for a full-time worker on the NLW. The £930 increase in annual earnings compares the gross annual earnings of a person working 35 hours per week on the new NLW rate from April (£8.72) versus the 2018/19 NLW rate (£8.21).

However, closer investigation suggests that the cost of this measure is going to be spread in unexpected ways. It is clear employer are paying but who is  benefiting and what help will small employers get for compliance.

Pay rise or stealth tax?

Thanks to Gareth Morgan for this further information.

The NLW may be £930 headline a year for  full time work, but it’s £631 after tax and NI on current rates. The NPW is only worth £233 if you’re getting Universal Credit though as it reduces the benefit.

In case the Ferret’s precision analysis needs unravelling, let’s look at the pay rise from the employer’s point of view.

Employing someone for 35 hours on minimum wage? The wage bill goes up £930 a year in April.  The employee on Universal Credit will get £233. The other £697 goes straight to the government in tax, NI and lower benefits. Add to this £128 employer NI if no Employment Allowance applies.

So, the measure supposedly aimed at helping the lowest paid gives them £233 and the government £825.

In many cases , it is not the Government paying for this increase, it’s everyone but. In cases such as this, NPW is little more than a corporate and personal stealth tax.

And it takes more than pay rises to alleviate workplace poverty

The mention of Universal  credit for those in work is no idle detail, According to research by the IFS , increased in-work relative poverty rate in Britain over the last 25 years, which has risen by almost 5 percentage points from 13% to 18%.

The IFS analysis shows that those in work on low incomes face higher housing costs, lower in-work benefits and a widening gap between their and standard of living and those of higher earners and even pensioners (who have caught up on incomes over the past ten years.

But a pay rise nonetheless

Never the less –  this “pay rise”  will be a welcome relief to all on low incomes, including  the working poor.

Not only do those on NLW benefit, but so do those younger earners on the New Minimum Wage (NMW)

The NMW extends the headline rise. It will rise across all age groups, including

• A 6.5% increase from £7.70 to £8.20 for 21-24 year olds
• A 4.9% increase from £6.15 to £6.45 for 18-20 year olds
• A 4.6% increase from £4.35 to £4.55 for Under 18s
• A 6.4% increase from £3.90 to £4.15 for Apprentices

The Accommodation Offset impacts those who have “live-in” jobs and restricts employers from getting round paying proper wages by over-charging for lodging.

The increased rates were recommended by the Low Pay Commission, an independent body that advises the government about the NLW and the NMW

These increases are greatly to be welcomed – provided they are paid for in a progressive way

What does this mean for pensions?

With the auto-enrolment earnings threshold set to stay at £10,000 , it means that there will be another tranche of savers in 2020. Many will find the extra £930 pa they get means they’re earning more than the £192 p.w. or £833 p.m. that triggers them saving 5% of pensionable earnings into a workplace savings plan.

For most of them, the cost will be cushioned by a Government incentive that saves them 25% of the pension cost, but – until Government adopts the “oven-baked” solution handed it by the Net Pay Action Group, pension inequality from a payroll lottery will remain.

We now hope that the Government will get round to implementing the long promised reforms to auto-enrolment into  workplace pensions, promised in the 2017 review. These changes in the minimum wage should make these changes easier (and are not a substitute). In case Government needs reminding…

We want pension saving to be the norm when most individuals start work. We therefore want young people from age 18 to benefit from automatic enrolment and our ambition is to lower the age criteria from 22 to 18.

Our ambition is to change the framework for automatic enrolment so that pension contributions are calculated from the first pound earned, rather than from a lower earnings limit of £5,876 (in 2017/18). As part of the proposals in this review, we would also remove the ‘entitled workers’ category

This wage rise should not be paid for by  compromising planned pension contribution increases – nor should it be used as an excuse not to sort out the net pay issue.

More to come

The Government has accepted the Low Pay Commission’s recommendations after they consulted stakeholders such as unions, businesses and academics, before recommending the NLW and NMW rates to the Government.

In September the Chancellor pledged to increase the NLW towards a new target of two-thirds of median earnings by 2024, provided economic conditions allow, which, on current forecasts, would make it around £10.50 per hour.

Since 2016, the lowest paid will have wage increases of  £3,680.This £3,680 increase in annual earnings compares the gross annual earnings of a person working 35 hours per week on the new NLW rate from April (£8.72) versus the 2015/16 minimum wage rate (£6.70).

According to Treasury forecasts the living wage is set to increase to £10.50 by 2024, fulfilling a pledge from the Tories for the lowest paid to be on at least 60% of average earnings.

And there’ll be more for younger workers. The Chancellor has also announced  plans to expand the reach of the NLW to cover workers aged 23 and over from April 2021, and to those aged 21 and over within five years. This is expected to benefit around 4 million low paid workers. But…

Who pays?

The majority of the cost of these rises will fall on employers and they will fall hardest on small businesses for whom wages form a high part of their overhead.

Many of these businesses do not have the capacity to put up prices or draw on reserves and are vulnerable to this squeeze on margins. Without the promised fall in corporation tax, many SME’s will be having to adjust their profit projections for 2020/21 and face an uncertain future.

To some extent, the Government is easing the load and the tax-payer is helping out. Increases to the National Insurance Bands and the lower rate income threshold means that more of these increases will stay in the hands of low-earners making working a lot more lucrative than claiming benefits.That is no doubt the sub-plot to the Government’s policy.

With the squeeze on benefits for the low-paid still in place (the price the poor are paying for the financial crisis), they have little choice but to work. The worry is that poverty being reported by the ONS, the IFS and a host of independent research has persisted amongst those who are being moved into work.

Let’s hope that the people who pay for this increase in real wages aren’t those who can’t work, who continue to see their benefits frozen or cut.

Who will benefit?

Britain is booming , but it’s booming for some people more than others.

The TUC research suggest that there are disproportionally more women  and “black, asian and minority ethnics” (BAME) on the living wage.

The low and low and middle earners that should benefit most from the NLW 6% pay-rise are groups of earners who have yet to be properly integrated into working life and yet to participate in workplace pensions.

We shouldn’t underestimate the high rates of employment in this country and the economic and social benefits they bring. They are a genuine policy success of Governments over the past ten years.

But amongst the very poorest, those who have nothing but benefits to claim, the proportion of women and BAME is still very high. Real poverty exists in Britain and it is not at acceptable levels.

In my view, the increase in NLW by 6% is to be welcomed , wherever you sit on the political spectrum. But it needs to be paid for by those who can afford it – not by those who can’t.

Britain is booming, those of us who earn most , have the means to meet the cost of this pay-rise.

This pay rise for low earners , should not be funded by those who cannot earn.