Budget 2020: Boost to national living wage to bolster income for low earners

The government plans to increase the national living wage (NLW) to reach two-thirds of median earnings by 2024.

As part of a big push to deliver prosperity in today’s Budget, chancellor Rishi Sunak has announced plans to increase the national living wage (NLW) to reach two-thirds of median earnings by 2024. This means it should stand at more than £10.50 an hour by that tax year. 

The wage floor currently stands at £8.21 and is already due to rise by 6.2% to £8.72 in April, giving the average low-paid worker almost £1,000 extra per year. Today’s measures will amount to an increase of around 20% from the April level, though they include the caveat the increase will take place “provided economic conditions allow”.

Low earners will also feel particular benefit from the new tax year with the further announcement that the national insurance threshold will be raised to £9,500 for employees and the self employed.

The government calculates that the typical employee should be around £104 better off and the typical self-employed will gain £78 in the coming tax year.

For low earners who also benefit from the rising NLW and bearing in mind increases in the personal allowance (currently £12,500, rising in line with the consumer price index from the 2021/22 tax year), the changes mean that from April a full-time employee earning the NLW will be more than £5,200 a year better off, compared with April 2010.

There could be a further benefit in the pipeline for low-paid workers as far as pension provision is concerned. At present, around 1.7 million workers earning less than the £12,500 annual personal allowance (and therefore paying no tax) receive no tax relief on any pension savings because of the way tax relief is administered by their pension scheme.

The government says that people in this position “may benefit from a top-up on their pension savings equivalent to the basic rate of tax, even if they pay no tax”, but that whether they receive this top-up or not currently “depends on how their pension scheme administers tax relief”.

The Budget commits the government to “reviewing options for addressing these differences” and says it plans shortly to “publish a call for evidence on pensions tax relief administration.”

Steve Webb, a partner at LCP, sees the announcement as a missed, or at least delayed opportunity. He says: “This injustice, which affects many lower paid workers in particular, must be addressed.  Instead, all we have from the Treasury is the promise of a ‘call for evidence’. If a review means no action for another year, this will prolong the unfairness to a group who need all the help they can get with their pensions”.