The new National Living Wage… So what exactly is it?

The current situation

At the moment, there’s a National Minimum Wage (NMW), a UK Living Wage and a London Living Wage.

The NMW is compulsory, and is currently set at:

  • £6.50 for those over 21 (set to increase by 20p in October 2015);
  • £5.13 for 18 to 20 year-olds (rising to £5.30 in October 2015);
  • £3.79 for 16 to 17 year-olds (£3.87 from October 2015) ;
  • £2.73 if you’re an apprentice between the ages of 16 and 18, or if you’re 19 or over and in the first year of your apprenticeship (changing to £3.30 in October 2015); and
  • if you’re an apprentice who is over 18, and not in the first year of your apprenticeship, then the other NMW rates will apply (so, at the moment, those would be the rates of £5.13 and £3.79 we mentioned above).

On the other hand, the Living Wage isn’t compulsory. It’s a recommended hourly rate set by the Living Wage Foundation, and the idea behind it is that it should cover the basic cost of living. So, while an employer must pay workers the NMW at the very least, the decision to pay them the Living Wage is entirely voluntary. At the moment, the Living Wage is £9.15 in London and £7.85 for the rest of the country.

How will this change?

In short, the plan is for a new “National Living Wage” (NLW) to be introduced from April 2016.  This will be an hourly rate of £7.20 – 70p higher than the current NMW. And, importantly, it will apply only to those over 25 years old.

It’s also worth noting that the current Living Wage will still exist, and it’ll still be voluntary. But it’ll be distinct from the new NLW.

But this is a good thing, surely?

That’s not bad at all, you might say. But it’s not so straightforward. The thing is, not everyone currently on the NMW, or who would have been on the NMW at the time this reform will take effect, will benefit from it. This is because the new NLW will only apply to workers over the age of 25. For under-25s, the NMW will still apply. And the reason for this? Well, the idea is that the main aim for those under 25 is to find work and obtain experience, and so having a lower minimum level of pay (compared to those on the new NLW) will facilitate this.

And what’s the reaction been?

Mixed, to say the least. Many workers will invariably see their gross income rise. But the flip side is that it will become more expensive for employers to keep the same number of minimum wage workers (over 25 years old) on. A possible consequence of this could be job cuts, or a reduction in working hours. To offset this potential rise in costs, the National Insurance contributions Employment Allowance will increase from £2000 to £3000, again from April 2016. Oh, and there will also be a reduction in corporation tax.

Whilst cautiously welcoming a rise in the minimum rate of pay, the Living Wage Foundation has highlighted several issues, including:

  • whether the new NLW is really a Living Wage, as opposed to simply being a more generous NMW;
  • that having one NLW across the board doesn’t reflect the higher cost of living for those in London; and
  • that this reform means under-25s are losing out, which is why it’s urging companies to pay them a Living Wage.

Still trying to get your head around it all?

You’re not the only one. This reform isn’t exactly straightforward, and even some of the experts aren’t sure how to interpret it. But hopefully, we’ll have made it a little clearer for you. But if you wanted to know a little more about the NMW as it stands, you can do so here:

More on the NMW

And if after all that, you’re feeling a little worse for wear, a cup of tea (and a biscuit or three) can do wonders.

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