What is the Low Pay Commission and How Could its Updated Remit Affect Wages in 2025?

What is the Low Pay Commission and How Could its Updated Remit Affect Wages in 2025?

Author: Sam Evans

Key Contact: Chris Aldridge

On 30 July 2024, Jonathan Reynolds, Business Secretary, wrote to the Low Pay Commission (LPC) and formally requested to update its remit for April 2025. On 6 September 2024, the LPC published a policy paper setting out how it would respond to its updated remit from the government.

 This article proposes to examine what this means in practice and provide a breakdown of how the LPC plans to respond to its revised remit.

Background to the LPC’s Role

The LPC is an independent body that advises the government on the National Minimum Wage (NMW) and National Living Wage (NLW). The NLW is paid to those aged 21 and over and reflects a higher rate. The LPC works according to a remit set by the government of the day each year.

The LPC’s primary aim is to recommend wage rates that strike a balance between raising pay for the lowest earners while ensuring that businesses, particularly small and medium-sized enterprises (SMEs), can absorb wage increases without adverse economic consequences.

The recent update to the LPC’s remit reflects the government’s broader goal of increasing the NLW towards two-thirds of median earnings by 2024, while remaining mindful of economic conditions, including inflation and employment levels.

Key Changes in the LPC’s Remit

Following the general election in July 2024, the government has instructed the  LPC to ensure that any recommendations for wage increases take account of the current economic situation. Notably, this includes taking account of inflation and its impact on workers’ real wages. In addition, the government has also requested that the LPC should narrow the gap between the National Living Wage paid to 21 year olds and the rate paid to the lower 18-20 age band (£8.60 per hour vs £11.44 per hour for those aged 21 or over who receive the NLW). The LPC has also been tasked with ensuring that the NLW does not fall below two-thirds of median hourly earnings.

How the LPC plans to respond

• The LPC has stated that any NLW increase in 2025 should take account of the cost of living and expected inflation up to March 2026. Any increase should also not fall below two-thirds of median hourly earnings- these factors will act as a ‘floor’ for the LPC. The organisation will only recommend a NLW increase below the ‘floor if this was necessary to avoid substantial negative outcomes (i.e. mass job losses for low-paid workers). 
• The policy paper  assumes that a rate of £12.10 an hour would be required to ensure that the NLW does not fall below two-thirds of median hourly earnings. This figure may be revised subsequently but it would at any rate represent a 5.8 per cent increase.
• The LPC will not abolish the 18-20 age band this year but it envisages larger pay increases for the 18-20 year old band than for those who receive the NLW (21 years and older).
• In its policy paper, the LPC states that it will continue to gather evidence from a range of sources and so its response may differ when it submits its recommendations to the government by the end of October 2024. 

Conclusion

The updated remit for the Low Pay Commission reflects a careful balancing act—one that aims to provide meaningful wage growth for the UK's lowest-paid workers while supporting businesses in an uncertain economic landscape. As the LPC moves towards recommending a National Living Wage that reaches two-thirds of median earnings, it will be crucial for both workers and businesses to stay engaged with the process, ensuring that economic growth and wage increases go hand in hand.

The LPC’s ability to adapt its recommendations to the evolving economic situation will play a key role in determining the success of these goals, with a focus on protecting jobs, promoting fair wages, and ensuring the stability of businesses across the country. Various low wage sectors with a high concentration of young workers may be particularly affected by the proposals to narrow the gap between the NLW and the 18-20 band for the NMW.

If you would like further information or advice about the National Minimum Wage or National Living Wage, please feel free to contact our Employment team.