The real winner from a National Living Wage increase is the Treasury which can take over 90% of the extra paid.

 The biggest losers are employers.

 I have written, for several years, in my blog about the real money transfer effects of increases in the National Living Wage (NLW) for many low earners.

The message from governments, when the level of NLW is increased, is that it’s to benefit the low paid. For many this is true; those whose earnings already mean that they are not eligible for means tested benefits, or those for whom the increase will lift them off benefits, may see much of the benefit of the increase.  There are many others who will continue to rely on means tested earnings to top up their earnings and, for them, the gains are less clear.

I’m writing this looking at the speculative figure being discussed around the increase in NLW.  In The Times, on the 25^th October, the figure of £12.70 a week was suggested with some confidence. I think it is worth looking at the values before the budget so that the government messaging about increases can be seen in context.

 Last year’s budget was tax raising. The employers’ National Insurance (NI) changes were tax raising, in a big way, but the NLW increase was supposed to be one of the ‘gives’ in the budget.

“Pay boost worth £1,400 a year for an eligible full-time worker – a significant move towards delivering a genuine living wage.” – www.gov.uk

I pointed out in last year’s comments that “… worth £1,400 a year…” was very, very unlikely.

I will model the real figures for 26/27 after the November budget but I wanted to share the effects of the suggested increase.  I’ve assumed no change to basic tax rates or allowances, or to employees and employers National Insurance contributions.  Benefit rates, likely to see a 3.8% increase for most benefits following September’s CPI figure as well as pre-announced Universal Credit changes, are not relevant as it is the reduction in benefits, whatever their value, that is relevant here.

None of this is a criticism of the national living wage, increasing earnings for the lowest paid is important and ought to improve their position.

Ought to.

For those not dependent upon benefits it will do. Others will be lifted out of benefit dependency and will see real gains.

But those low earners still dependent upon the support of the benefit system will see some of the increases in gross earnings, paid because of the increase in NLW taken away from them by increases in their tax and National Insurance and reductions in their benefit entitlement.

For many workers, ‘some’ may mean ‘much’.

We should remember that the NLW and minimum wage increases, however trumpeted, are not coming from the government’s pocket but from employers.  Again, I would not seek to defend low-paying employers but it is undeniable that this is a transfer of money which may have consequences including pressures on employers and increases in prices.

My apologies for the level of detail here but it is important to see the reasoning behind the calculations. My blog contains posts with the similar tedious levels of detail for previous years if anybody is interested.

I begin by looking at the effect of earnings at the suggested NLW level for somebody working 35 hours a week. All the figures in the tables are weekly.

Table 1

Table 1 shows that someone working at that level will see an increase in their take-home pay of about £17.15 a week in April 2025.  At this earnings level, the freezing of tax and NI thresholds means that the whole increase is liable to full deductions.

It is a welcome increase in gross pay, as people on NLW levels of pay are amongst the poorest workers that the government is trying to help.

The government is already helping many of them, of course, through the benefits system and the extra net earnings are going to be very welcome – or they would be if they were extra.

The reality is that the government gives with one hand and, often, takes with two.

Most means tested benefits, unsurprisingly, pay you less when your resources increase.

The increase in net earnings will change any means tested benefits that are being received. If somebody, typically, is getting help with rent through Housing Benefit (HB) and council tax through Council Tax Reduction (CTR) then 65% of any increase in net income is taken away from HB and another 20% typically, from CTR.

That changes the picture a little.

Table 2

The 2026 increase of about £17 a week in gross earnings becomes a less than impressive £1.85.

If somebody is getting help from the newer Universal Credit, the figure’s similar if a little more generous, thanks to the reduction in the taper rate, to 55%,  introduced during Covid.

Table 3

Qui redddit?

We can see who benefits, if at a much lower level for many than is being claimed, but it’s also worth considering who pays. Tax cuts and benefit increases, along with changes to minimum wages, are presented as government generosity.  Sadly, this doesn’t stand up to examination.  Wages are paid by employers, from which employees pay deductions including tax and NI.  Employers pay an additional NI amount. That adds to the cost of any increase in NLW.  There were big change in 2025 in the employers rates of NI, not expected to be repeated for the next year.  Fiscal drag of course, as always, worsening things.

Table 4

Table 4 shows the additional weekly cost to the employer of the increase in NLW and employers NI.

Table 5 shows a summary of the 2025 and 2026 changes and the consequential effects.  Remember that, at NLW levels of pay, it is very likely that there will be an entitlement to means tested benefits. The main means-tested benefits received by working age adults are Universal Credit (UC), Housing Benefit (HB) and Council Tax Reduction (CTR).

Table 5

We can see that the government requires employers to pay almost £20 a week extra to full-time workers on the NLW.  The worker on means tested benefits may get less than 10% of that with the government receiving, or saving, the other 90%.

This is what the extra looks like annually:

Table 6

In percentage terms that becomes:

Table 7

Part-time work and NLW

The position is a little different for part-time workers. They are likely to be earning below the tax and NI thresholds but they are also more likely to be dependent upon means-tested benefits.

I won’t repeat the detailed calculations (I’m happy to provide those if there’s any interest) but will just show the end figures and percentages for someone working for 16 hours at NLW.

Table 8

Table 9

London Living Wage (LLW) and UK Living Wage (UKLW)

The Living Wage Foundation calculates real living wages, based on the costs of living for a minimum standard.  The rates are used by many responsible businesses and organisations to determine the levels of pay for their employees.  They assess a higher rate for London because of the higher costs there.

The 2026 hourly rates were announced on October 22^nd and are £13.45 in UK and £14.80 in London.

Although these rates are substantially higher than the NLW, many workers still depend upon means-tested benefits and so face the same combination of increased deductions which reduce the real value of increases in the amounts.

Here are the comparable full-time figures showing the effects of the increased rates.

Table 10

Table 11

Conclusion

It’s difficult not to admire the skill with which the government presents themselves as giving generously, actually gives the worker little, makes the employer pay all the costs and takes the bulk of the money for themselves.

As I said earlier, his should not be taken as an attack on NLW and living wages, or any suggestion that it is not worthwhile.  As they increase, more workers will be lifted off means-tested benefits and then see the benefit of the higher rates of pay.  I simply want to puncture the ‘government giveaway’ message, show the much smaller gains for the lowest paid and remind ourselves of who pays.

While this looks very, very like a stealth tax on employers, consider what may cause more increases in the cost of living. Increases being passed on by employers facing extra costs in their workforce.

A vicious circle?