Budget 2024: Minimum wage to rise to £12.21, but will Labour take 27% of the increase in tax

“There has been another pre-budget leak from the Chancellor. On 29 October Rachel Reeves confirmed that the national minimum wage would rise in April 2025 by 6.7%. This is an increase from £11.44 to £12.21 an hour. Reeves stated that this pay boost marked a “significant step” towards achieving Labour’s promise of a “genuine living wage”. However, there are two important catches here.

First, this is another constraint on economic growth as businesses will have to find this additional funding. Some businesses will close, and some will lay off staff or decide not to replace employees as they leave.

Second, there is a dark side to this increase. Reeves argues that this is a significant step towards a genuine living wage. I have no idea what this would be or how one would calculate this. However, this is not the dark side. The dark side is that the Chancellor gives, and the Chancellor also takes away. Thus, a 21-year-old working 2080 hours a year (40 hours/week) would have an annual salary from April 2025 of 25,396, or an increase of £1,601. They will, however, pay an additional £304,00 in income tax and £128.00 in National Insurance*. This comes to an additional tax take for this government of £432.00 or 27% of the increase in the minimum wage. We then need to factor in any increase that comes from the proposed increase in employer national insurance.

There are two issues here. First, I would very much hope that Rachel Reeves plans to raise the tax threshold to ensure that all this increase in the minimum wage goes to the worker. It seems inappropriate for this government to argue that that they are promising low paid workers a genuine living wage and then to take back 27% of the proposed increase. Second, this is another tax on businesses. By raising the minimum wage by 6.7%, Reeves has increased the government’s tax on businesses. This is meant to be an employee and employer friendly government, but the reality is quite different to the political rhetoric."

*This calculation assumes that 5% of salary is allocated to pension contributions.