Policy paper

National living wage (NLW)

Updated 1 April 2016

1. About the new national living wage

The government wants to move from a low wage, high tax, high welfare society to a higher wage, lower tax, lower welfare society.

With record employment, the highest GDP growth in the G7, over 2 million jobs created since 2010, and 1.1 million more forecast by the Office for Budget Responsibility (OBR), the government believes that now is the right time to take action to ensure low wage workers can take a greater share of the gains from growth.

The new national living wage is an essential part of this. It ensures that work pays, and reduces reliance on the state topping up wages through the benefits system.

2. Rates

From 1 April 2016, the government introduced a new mandatory national living wage (NLW) for workers aged 25 and above, initially set at £7.20 - a rise of 50p relative to the current National Minimum Wage (NMW) rate. That’s a £910 per annum increase in earnings for a full-time worker on the current NMW. The adult NMW rate is currently £6.70. This will continue to apply for those aged 21 to 24.

The NLW was introduced through amendment to the NMW Regulations 2015, to ensure the rules that apply to the NMW rates for workers aged under 25 also apply to workers entitled to the NLW.

The NLW rate applies to any pay allocated on a monthly reference period starting on 1 April 2016. If a pay reference period starts and ends either side of 1 April 2016, employers will need to look at the rate that applied at the start of the pay reference period and pay that rate for the relevant period.

For example, if the pay reference period starts on 19 April, the allocated pay between 1 April and 18 April 2016 will be based on NMW rates of pay. Allocated pay from the 19 April 2016 onwards should be based on the NLW rate.

3. Low Pay Commission and future rates

The government published the Low Pay Commission’s (LPC) new remit on 8 July 2015. The government has asked the LPC to recommend the level of the path of the national living wage going forward, with the target of the total wage reaching 60% of median earnings by 2020. On OBR forecasts a full-time NMW worker will earn over £4,400 more by 2020 from the NLW in cash terms.

The LPC will also continue to provide recommendations for the other NMW rates as they have done previously.