Minimum wage increases with the biggest impact

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There are still three weeks until the next budget is tabled, but weary political pundits are already confident that Rachel Reeves, the UK Chancellor of the Exchequer, will announce some policy.

One is to further extend the freeze on the threshold at which people start paying basic and high-rate income tax.

Another is that the National Living Wage (NLW), the minimum hourly wage that UK employers must pay to workers aged 21 and over, will rise by 4% to £12.70 ($16.56) from the start of the new tax year in April 2026.

This would give someone working 40 hours a week at NLW an annual salary of £26,416. (The NLW is not to be confused with the lower national minimum wage paid to people aged 16 to 21, although there is some speculation that Mr Reeves will bring it in line with the NLW for workers aged 18 and over).

This confirms that the UK has one of the highest legal minimum wages in the world, lower than Australia and New Zealand, but higher than its peers such as France and Germany, and significantly higher than Japan, the US and Canada.

This is already impacting the entire economy. The latest NLW rise (to £12.21 in April) was accompanied by an increase in employer national insurance (payroll tax) and a reduction in the level of coverage of the latter. This has led to sharp rises in employment costs and corresponding job losses, particularly in the hospitality industry. The number of people in paid employment in the UK fell by 115,000 between August 2024 and August this year. This move also contributed to rising inflation.

But the wage increases expected this month could have another impact. According to the Financial Times, many employers are concerned that after the expected rate of increase, NLW employees will end up earning close to the typical starting salary for graduate students in professions such as accounting, law and finance.

The paper quoted one chief executive as saying: “Why would young people take on £45,000 in student loans when they could earn the same stack of cash?”

These dynamics threaten to undermine the established assumption that a college degree guarantees better jobs and higher incomes. This assumption underpinned the massive expansion of university education that began in 1999 with former Prime Minister Tony Blair, who said he wanted 50% of school leavers to go on to university, up from around a third at the time. That goal was achieved in 2019.

However, attending university has become much more expensive, and the cost of higher education has been transferred from the state to individuals through tuition fees. Tuition fees were set at £1,000 a year when introduced by the Blair government in 1998, but have since risen to £9,535 a year in England (though lower in Wales and Northern Ireland, where Scottish students study in Scotland are free of tuition fees). Most students take out loans to repay these fees, which are now repayable once a graduate’s salary reaches £25,000. These repayments are 9% of your salary and effectively act as graduate taxes.

So not only does an increase in the National Living Wage threaten to equalize graduates’ starting salaries in professional jobs, but graduates earning the same salary as NLW students will actually take home less if they take out student loans.

On the other hand, job opportunities for graduate students are decreasing. The Student Employers Association reported last month that graduate employers had cut hiring for the second year in a row, reducing the number of hires by 8% in the latest academic year alone. Three of the UK’s ‘big four’ accountancy firms (PwC, EY, KPMG and Deloitte), traditionally among the biggest recruiters of new graduates, have further reduced their hiring numbers.

So could this push 18-year-olds away from university and towards trades, apprenticeships or even entrepreneurship?

Current Prime Minister Keir Starmer abandoned Blair’s goals in September, claiming they were “unsuitable for modern times” and suggesting these were his own goals. Instead, he wants two-thirds of school leavers to go on to either university, further education or a “gold standard apprenticeship” (which ultimately results in a technical qualification) by the age of 25.

The increased focus on training and skills is a major shift in tone, but manufacturers in particular are questioning their ability to provide training after higher education courses have been closed for years. The introduction of the apprenticeship levy in 2017 (a 0.5% tax on employers with annual salaries of over £3m) was intended to fund more skills training, but instead it has led large employers to focus on existing employees rather than new ones. The number of apprenticeships has fallen by a third since 2015, and engineering apprenticeships have fallen by 40% since 2017.

Despite the increased emphasis on skills – one major engineering firm is now said to be offering a skilled welder a salary of £90 an hour – there is little evidence that 18-year-olds are refraining from going to university. The University Admissions Agency (UCAS) reported in February that the number of people applying to university in the new academic year was a record high of 600,660, representing a 1% increase in 2024-25.

And although the graduate pay premium has shrunk, it still exists. King’s College London’s Institute for Policy Research and the centre-left think tank the Resolution Foundation reported in January that an undergraduate degree is worth an average extra £280,000 for men and £190,000 for women, excluding tax and student loan repayments, compared to their lifetime earnings if they hadn’t gone to university.

Therefore, current concerns may be overdone. The logic is that NLW workers are likely to maintain wages at or near this wage in most cases, while graduates in professions such as accounting can expect significant wage increases as their careers progress.

A rise in the National Living Wage could therefore reshape the UK job market, many of which are already in financial trouble as a result of overexpansion, but don’t expect that to change anytime soon.

— Ian King

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— Yeo Bunping, Holly Ellyatt

This week’s quote

at the market

of london FTSE100 It has risen slightly over the past week and is up about 0.1% in the seven days to Tuesday’s close. Corporate earnings are a hot topic for British investors, with London-listed companies such as HSBC, GSK, and oil giants Shell and BP making announcements one after another.

Meanwhile, the UK benchmark yield is 10 year government bond — known as Gilt — had a volatile Tuesday after Reeves’ surprise speech before the budget.

The Prime Minister addressed speculation that the ruling Labor Party would break its manifesto pledge not to raise taxes for working people, but declined to give a final answer on whether tax increases were being considered.

Yields fell by as much as 4 basis points during his speech, but the decline narrowed as he gave no specific guidance on what he expected to happen on November 26.

Julian Howard, chief multi-asset investment strategist at GAM Investments, said the gold market reaction reflected “initial relief and then alarm” and said there was a “frustrating lack of detail” in the speech.

of british pound It has fallen about 1% against the U.S. dollar over the past week, trading around $1.3035 late Tuesday.

— Chloe Taylor

very soon

5th November: UK new car sales for October
November 6: Bank of England interest rate decision
November 11: UK unemployment rate for September

— Holly Ellyatt