Rachel Reeves warned living wage hike will lead to job losses

The chancellor is looking at raising the living wage to at least £12.70 in her Budget

Businesses have warned Rachel Reeves that she risks forcing more job losses if she presses ahead with plans to raise the minimum wage.

The chancellor is believed to be looking at increasing the amount to national living wage of about 4 per cent, from £12.21 to at least £12.70 and extending it to 18 to 21-year-olds.

The move would help appease demands from Labour backbench MPs who want to see the least well-off get a boost while the rich and big corporations are hit by wealth taxes.

But the leader of the UK’s hospitality sector has warned that the move would be disastrous for the industry.

Businesses have already been hit in last year’s budget with a double blow of the living wage being hiked at the same time as a rise in national insurance contributions (NICs) for employers.

Rachel Reeves has said she wants the ‘broadest shoulders’ to bear the heaviest tax burden in new Budget (PA)

The so-called “jobs tax” raised around an extra £20bn but has seen an estimated 100,000 jobs lost in the hospitality sector alone with many other companies imposing recruitment freezes.

Kate Nicholls, head of the trade body UKHospitality, said: “Businesses are already struggling to absorb all the costs from last year, two successive years of significant minimum wage rises and crucially NICs [national insurance contributions]. We have seen 100,000 jobs lost as a direct result of that.

“If you want fair pay, you have got to have sustainable businesses. If you are pricing those jobs out of existence, it doesn’t matter how high the minimum wage goes. Businesses simply can’t digest and absorb these costs. It is having real-world consequences on jobs, livelihoods and business viability. It’s the cumulative impact.”

The government normally takes the advice on the living wage from the Low Pay Commission.

The independent body suggested in May that the living wage should increase from £12.21 to between £12.50 and £12.80. Its “central estimate” was £12.65.

But since then, following a series of public sector pay awards, wage growth has been stronger than expected, rising by 4.8 per cent from June to August 2025.

Ms Reeves has insisted in recent statements that she wants “those with the broadest shoulders” to bear the brunt of tax rises.

The chancellor is expected to need to fill a Budget black hole of between £30bn and £40bn while she has also stated that she wants headroom of above £10bn to give her flexibility to deal with shocks next year.

This means she will be looking for tax rises, with raising income tax believed to be an option despite the Labour manifesto pledge not to do so. A VAT rise appears though appears to have been ruled out.

Other options are a raid on bank profits, a new gambling tax and a series of potential wealth taxes, including changes to property taxes.