Summer Budget 2015: A 500-word summary for the UK business community

Working people aged 25 and over will be recipients and it will start from April 2016 at the rate of £7.20.

George Osborne added that the Low Pay Commission would be recommending future rises that achieve the government’s objective of reaching 60 per cent of median earnings by 2020. That is the minimum level of pay recommended in the report to the Resolution Foundation by Sir George Bain, chair of the Low Pay Commission.

There has been a mixed reception to the announcement, with some welcoming the change but others suggesting problems remained – particularly for small businesses.

Iain McCluskey, tax partner at PwC, said: “Whilst many lower paid taxpayers will have been pleased with the slightly increased minimum wage, now rebranded as the ‘living wage’, the lack of substantial earnings limit leaves many of the poorest employees outside of the income tax system but still liable for NIC.”

Guy Ellison, head of UK equities at Investec Wealth & Investment, said: “National living wage will see an 11 per cent uplift from £6.50 to £7.20 next April for those on the minimum wage, weighing most heavily on the biggest employers such as retailers, leisure and support service companies.”

Read more from our summer Budget commentary:

• George Osborne says tax dodgers have “nowhere to hide”
• George Osborne adds more detail to Northern Powerhouse plans
• George Osborne permanently fixes Annual Investment Allowance at £200,000
• Cut in corporation tax welcomed by British businesses
• Apprenticeship levy so firms “get back more than they put in”
• Roads Fund introduced as part of the plan to boost productivity

Osborne pointed out that the OBR said the new living wage would have a “fractional” effect on jobs and that by 2020, there would be an estimated 60,0000 fewer jobs as a result of the changes, but almost one million more in total.

In a bid to reassure businesses, the chancellor also reiterated that the cost to business will amount to one per cent of corporate profits, which he has offset with the cut in corporation tax to 18 per cent. Smaller firms would be helped by a cut in their national insurance contributions. From 2016, the new employment allowance will be increased by 50 per cent to £3,000 and a company employing four full-time workers on the new national living wage would pay no national insurance.

Osborne expects six million people to see their pay increase as a consequence.

The deputy director of the Adam Smith Institute, Sam Bowman, however said the change was “a disaster”.

“It will condemn tens of thousands of people to long-term unemployment. Almost all of the most methodologically robust academic studies indicate that increases in the minimum wage kill jobs,” he added. “Low-skilled people, young people and ethnic minorities are the ones who are hit worst.”

Bowman also suggested the rise could slow down the creation of new jobs “particularly in sectors that employ large numbers of low-skilled workers”, while warning that firms could respond to the change by cutting back on compensation such as break times and sick leave, in order to offset the increased labour costs.”

By Rebecca Smith