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Chancellor unveils ‘national living wage’ and freezes in-work benefits

What the Emergency Budget 2015 means for HR

National Living Wage announced
Chancellor George Osborne unveiled a new national living wage (NLW) in his Emergency Budget today because “Britain deserves a pay rise”, he said.

The new compulsory level of pay will see hourly wages raised to £7.20 in April 2016 and £9 an hour by 2020 for workers aged over 25.

This represents a 50p improvement on existing plans to increase the national minimum wage (NMW) to £6.70 in October this year, as previously set out by Osborne in his coalition government Budget last March.

Today's hike in hourly pay, coupled with a rebrand of the NMW, is part of a wider range of polices intended to move the UK economy from a “low wage, high tax, high welfare economy; to the higher wage, lower tax, lower welfare country”, Osborne said.

Citing research from the Office for Budget Responsibility (OBR) he said that the new NLW would only have a “fractional” impact on jobs. “[The OBR] said that by 2020 there will be 60,000 fewer jobs as a result of the NLW but almost one million more in total," he said. "They also estimate that the cost to business will amount to just 1 per cent of corporate profits. To offset that I have cut corporation tax (CT) to 18 per cent.” He explained that CT will be cut from 20 per cent to 19 per cent by 2017 and 18 per cent by 2020.

The term 'living wage' is already in use by the Living Wage Foundation, which has set pay levels of £9.15 in London and £7.80 in the rest of the UK. Both amounts, which are already paid voluntarily by many employers, are lower than those unveiled by the chancellor today.

Commenting on the announcement, Rhys Moore, director of the foundation, said: “Is this really a living wage? [Our] living wage is calculated according to the cost of living whereas the Low Pay Commission calculates a rate according to what the market can bear. Without a change of remit for the Low Pay Commission this is effectively a higher NMW not a living wage.

“These changes will not help the 586,000 people for whom even the 2020 rate announced today would not be enough to live on now.”

Mark Beatson, chief economist at the CIPD, said: “The proposed national living wage is an upgrade of the existing national minimum wage for the over 25s. The OBR says it will have little net effect on employment, but their forecasts rely on assumptions about future productivity growth that have proved wrong to date.  This policy will only deliver higher pay without significant job losses if it is accompanied by a drive to increase productivity in low pay sectors such as retail, hairdressing, hospitality and the care sector – and that will need more than delivery of apprenticeship numbers or employment subsidies via the National Insurance Contributions system.”

In-work benefits to be frozen

Osborne said: “Since the crash, average earnings have risen by 11 per cent, but most benefits have risen by 21 per cent. To correct that we will legislate to freeze working age benefits for four years.”

The freeze will include tax credits and local housing allowance, however, it will not cover statutory payments such as maternity pay, and disability benefits such as PIP, DLA and ESA Support Group will also be exempt from the freeze.

This announcement follows on from the Prime Minister’s comments last month that he wanted to tackle the “merry-go-round” of low pay and benefits where people in low paid jobs are subsidised with benefits payments.

The chancellor said that from 2016 the government will reduce the level of earnings at which a household's tax credits and universal credit start to be withdrawn.  

“The income threshold in tax credits will be reduced, from £6,420 to £3,850 and universal credit work allowances will be similarly reduced – and will no longer be awarded to non-disabled claimants without children,” he said.

"The rate at which a household’s tax credit award is reduced as they earn more will be increased, by raising the taper rate to 48 per cent. And the income rise disregard will be reduced from £5,000 to £2,500 – the same level at which it was originally set in 2003.”

Apprenticeships levy

Osborne said that the government had already doubled the number of apprenticeships to two million and was committed to creating three million more.

However, he said that to fund those apprenticeships and make sure they’re of high quality, the UK had to confront a difficult truth.

"While many firms do a brilliant job training their workforces, there are too many large companies who leave the training to others and take a free ride on the system.

"So we are going to take a radical, and frankly long overdue approach. We are going to introduce an apprenticeship levy on all large firms. Firms that offer apprenticeships can get more back than they put in."

He explained that the money would be directly controlled by employers and that the government would work with business on the best way to do this. "It’s exactly the sort of bold step we need to take if Britain is going to raise its game," he added.

Commenting on the levy, Beatson said: “The government’s introduction of an apprenticeship levy does highlight the importance of investing in training, but there is a concern that this could reduce broader workforce development if it is introduced in isolation without consideration of the UK’s broader skills challenges, for example inadequate leadership and management capability.”

He urged the government to provide more detail about how they intend to encourage a culture of lifelong learning, training and development. He also called for this to include opportunities for people aged over 25.

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