Who gets the extra money from National Living Wage increases - and who pays?
The real winner from the NLW increase is the Treasury.? The biggest losers are employers.
The budget was tax raising. That’s accepted by everyone.? The employers NI changes are tax raising, in a big way; that’s also accepted. The NLW increase is supposed to be one of the ‘give aways’ in the budget, but, when you look at it it's not not.
“Pay boost worth ￡1,400 a year for an eligible full-time worker – a significant move towards delivering a genuine living wage. www.gov.uk”
“… worth ￡1,400 a year…” is very, very unlikely
The reality is that the government, in many cases, takes 94% of the extra paid.
None of this is an attack on the national living wage, increasing earnings for the lowest paid is important and ought to improve their position.
Ought to.
For those not dependent upon benefits it will do. Others will be lifted out of benefit dependency and will see real gains.
But those low earners still dependent upon the support of the benefit system will see some of the increases in gross earnings, paid because of the increase in NLW, taken away from them by increases in their tax and National Insurance and reductions in their benefit entitlement.
For many workers, ‘some’ may mean ‘much’.
We must remember that the NLW and minimum wage increases, however trumpeted, are not coming from the government’s pocket but from employers.? Again, I won't defend low-paying employers but it is undeniable that this is a transfer of money which may have consequences including pressures on employers and increases in prices.
At the risk of boring readers, even more than usual, I've looked at this in previous years, a few times, in my blog at https://benefitsinthefuture.com/national-living-wage-cui-bono/ ,
https://benefitsinthefuture.com/the-government-is-going-to-be-extremely-generous/ and The government is continuing to be extremely generous…to itself? - NLW 2024 – Benefits in the Future?
Lets start off by looking at the effect of earnings, at the NLW level for somebody working 35 hours a week, on net pay. All the figures in the tables are weekly.
Table 1 shows that someone working at that level will see an increase in their take-home pay of about ￡18.87 a week in April 2025.
That’s a welcome increase as people on NLW levels of pay are amongst the poorest workers that the government is trying to help.
The government is already helping many of them, of course, through the benefits system and the extra net earnings are going to be very welcome - or they would be if they were extra.
The reality is that the government gives with one hand and, often, takes with two.
Most means tested benefits, unsurprisingly, pay you less when your resources increase.
The increase in net earnings will change any means tested benefits that are being received. If somebody, typically, is getting help with rent through Housing Benefit (HB) and council tax through Council Tax Reduction (CTR) then 65% of any increase in net income is taken away from HB and another 20% typically, from CTR.
That changes the picture a little.
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The 2025 increase of about ￡27 a week in gross earnings becomes a less than impressive ￡2.83.
If somebody is getting help from the newer Universal Credit, the figure’s similar, if a little more generous thanks to the reduction in the taper rate introduced during Covid.
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Qui redddit?
We can see who benefits, if at a much lower level for many than is being claimed, ?but it’s also worth considering who pays. Tax cuts and benefit increases, along with changes to minimum wages, are presented as government generosity.? Sadly, this doesn’t stand up to examination.? Wages are paid by employers, from which employees pay deductions including tax and NI.? Employers pay an additional NI amount. That adds to the cost of any increase in NLW.? There are big change in 2025 in the employers rates of NI;?Fiscal drag of course worsening things.
Table 4 shows the additional weekly cost to the employer of the increase in NLW and employers NI.? The increase is substantial because of the change in the threshold figure and the 1.2% rate increase.
Table 5 shows a summary of the 2025 changes and the consequential effects.? Remember that, at NLW levels of pay, it is very likely that there will be an entitlement to means tested benefits.
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We can see that the government requires employers to pay over ￡45 a week extra to full-time workers on the NLW.? The worker on means tested benefits may get as little as 6% of that with the government receiving, or saving, the other 94%.
This is what it looks like annually:
In percentage terms that becomes:
It’s difficult not to admire the skill with which the government presents themselves as giving generously, actually gives the worker little, makes the employer pay all the costs and takes the bulk of the money for themselves.
As I said earlier, his should not be taken as an attack on NLW, or any suggestion that it is not worthwhile.? As it increases, more workers will be lifted off means-tested benefits and then see the benefit of the higher rates of pay.? I simply want to puncture the ‘government giveaway’ message, show the much smaller gains for the lowest paid and remind ourselves of who pays.
While this looks very, very like a stealth tax on employers, consider what may cause more increases in the cost of living. Increases being passed on by employers facing extra costs in their workforce.
A vicious circle?