Budget 2015: Five things you need to know about the 'living' wage

The living wage plans are hugely significant for low paid workers across the country - Oliver Wright explains how it will work

The living wage is currently worth £9.15 an hour in London (Getty Images)

Q | What is the plan?

A | From next April the national minimum wage will rise from £6.50 to £7.20. It will continue to rise incrementally to reach £9 an hour by 2020 at a rate to be determined by the Low Pay Commission. The Government predicts around 2.7 million low wage workers will benefit.

However, the new minimum wage will only be paid to the over 25s. Younger employees will continue to be paid at the current lower minimum wage rate – even though they will be hardest hit by the cuts to working tax credits and housing benefit.

Q | So does that mean the worst-paid workers (over 25) will be better off?

A | Not necessarily. In the Budget, George Osborne announced big cuts to benefits including a freeze on tax credits for four years and a lowering of the level at which they are reduced. Depending on individual circumstances, this could more than wipe out any gains made from a bigger pay packet. Labour said a couple who both worked full time on the minimum wage would gain £1,560 from the new living wage but would lose £2,000 from the changes to tax credits.

Q | Is it really a living wage?

A | The Living Wage Foundation says the current calculation for what represents a wage people can live on is £7.85 an hour outside London and £9.15 in the capital.

Under the Government’s plans, even adjusting for inflation, by 2020 the new legal minimum wage will be above that. However, there will be no separate higher minimum wage level for London despite increased living costs.

There is also concern that the current living wage already takes tax credits into account and when they fall in real terms what was a “living” wage may no longer be so. The Resolution Foundation calculates that without Government in-work support, the London living wage would need to rise from £9.15 to £12.65 an hour, while Labour says benefits subsidise the working poor by more than £2 an hour. This is far below the Chancellor’s proposed rates.

Q | Will businesses be able to afford the new higher rates?

A | The Chancellor said that the Office of Budget Responsibility believed that the new wage would only have a “fractional” effect on jobs. They predicted that by 2020 there will be 60,000 fewer jobs as a result of the National Living Wage but almost one million more in total.

Mr Osborne added that cuts in corporation tax would help big business absorb the extra costs while he would cut national insurance contributions for small firms. But the Association of Convenience Stores said it was a “reckless measure” that would lead to retailers having to reduce staff hours and cancel investment plans.

Q | So are the Conservatives now the party of the poor?

A | No, not really. What this move is about is shifting the burden of helping people on low incomes from the state to the private sector. Freezing tax credits will save the Government £4bn a year while other changes to working benefits will save a similar amount. Mr Osborne is hoping that some of the pain from these cuts will be met through increased wages.

Mr Osborne is determined that a Tory-only Government will shrink the role of the state and create a low tax, lower welfare and (potentially) higher paid economy. However, critics claim that his plans will remove the safety net for some of the most vulnerable in society and undermine the principles of the welfare state.