£1,000 minimum wage rise will only be worth £265 for full-time workers on universal credit

Rishi Sunak announced a living wage rise he says will boost annual income for full-time workers by £1,000 – but think-tanks say £265 is a more realistic figure.

The increase to the minimum wage – recently rebranded as the national living wage for those aged 23 and above – will take effect from April next year.

Those aged 21 and 22 will see the greatest increase to their pay; up 83p to £9.18; while 16 and 17-year-olds will get just a 19p increase and 18-20 year olds a 27p increase.

Chancellor Rishi Sunak said the increase “ensures we’re making work pay and keeps us on track to meet our target to end low pay by the end of this Parliament”.

The measure to increase the pay of low-income workers may have been positioned to compensate for the cut to universal credit earlier this month, which The Joseph Rowntree Foundation calculated would result in many claimants being £1,040-a-year worse off.

However, while a person working full-time (35 hours a week) receiving the new and improved living wage of £9.50 per hour and receiving universal credit would see pre-tax pay rise by £1,074, they would see take-home pay go up by just £265 a year.

This is “thanks to the taper in universal credit, and payments of income tax and the higher rate of National Insurance contributions”, explained Nye Cominetti, senior economist at the Resolution Foundation.

Ministers had considered lowering the taper rate, which would allow people to keep more of what they earn, however this has not yet transpired. Currently, recipients of Universal Credit lose 63p of every extra pound they earn in cuts to their benefits. 

The rise does “not remotely compensate” for the cut, Cominetti continued.

Paul Johnson, director of the Institute for Fiscal Studies (IFS), estimated that workers would receive even less of a boost, at £250 more per year, showing that the Treasury’s estimate was “obviously not true.”

Anti-poverty campaigners including Helen Barnard, associate director Joseph Rowntree Foundation, also highlighted that rising costs of living including food and energy prices “massively outweighed” the increase.

And “those out of work get nothing,” she added.

The £20 per week cut earlier this month saw one teenager forced to quit her A-levels to find full-time work as she could no longer afford the bus to college. 

The 6.6 per cent increase has been praised for being more than twice the current 3.1 per cent rise in the cost of living. This may, in part, help to address the soaring prices and inflation seen across goods in the UK, amounting to what devolved nations’ leaders called a “cost of living crisis.”

Supermarket prices increased by 1.1 per cent in August, the Office for National Statistics said, while energy bills have risen steeply with concerns bills could rise by as much as £400 per year for some people.

National insurance will also rise from April 2022 to fund controversial reforms to England’s social care system. 

“This will do little to compensate for this month’s universal credit cut, nor the hike in national insurance next April,” said Unison general secretary Christina McAnea. 

“Low-income families need a boost now. With everything costing more, poorer households can’t afford to wait until next year.”

Labour passed a motion to back a £15-per-hour minimum wage at this year’s party conference.

“This underwhelming offer works out at £1,000 a year less than Labour’s existing plans for a minimum wage of at least £10 per hour for people working full-time,” said Bridget Phillipson, Labour’s shadow chief secretary to the treasury.

Recent estimates of monthly rents released by the ONS showed that anyone over 23 working full time on the national living wage would not be able to rent a home for less than a third of their pay in a single region of England.

The Living Wage Foundation has campaigned for a living wage of £9.50 across the UK, and £10.85 in London, and responded to the news saying that the “significant increase” was a “positive step”.

The Foundation will look to calculate updated living wage rates based on covering living costs next month.