National Living Wage explained & updated rates for 2025

Budgeting for paying employees in a small business can be confusing; especially when pay keeps shifting. What’s more, the latest changes in the National Living Wage (NLW) throw even more curveballs. Not only have NLW rates increased for employers, but the new amount now applies to all employees aged 21 and over. 

But wait – isn’t that what the National Minimum Wage (NMW) is for? 

You’re not wrong to be confused. Both are government-set minimum hourly wages, but the living wage was specifically designed to apply to older staff, while the minimum wage has tiered rates for younger workers.

This guide will break down the key differences between the NLW and the NMW. We’ll explore why NLW was introduced in the first place and even delve into the Real Living Wage (RLW) – a higher voluntary standard some companies chose to adopt.

National Living Wage rates for 2024/2025

All minimum wage rates, including the NLW, are set by the Department for Business each year on the advice of an independent advisory group, the Low Pay Commission.

As of April 2024:

• Workers aged 21 and over will be paid the National Living Wage
• Workers aged 16 and over will be paid the National Minimum Wage
• Apprentices under 19 or in the first year of training will be paid the apprentice wage

New rates for National Living Wage

New rates for National Minimum Wage

National Living Wage: legal requirements

Employers are legally required to pay a minimum wage to all workers, regardless of their employment status. That includes agency staff, as well as those who are enrolled on zero-hours or part-time work contracts. Only sole traders and volunteers do not qualify.

Failure to comply with the new National Living Wage and National Minimum Wage could result in a £20,000 fine for the business owner.

Companies must check with a payroll service expert that staff salaries, bonuses, and commissions are updated and in-line with the latest legislation.

Why was the National Living Wage introduced?

The National Living Wage was first introduced in the UK in April 2016 by former prime minister David Cameron. At the time, it applied to “experienced” workers aged 25 and over and was intended to improve their standard of living at a faster pace than the National Minimum Wage.

While the NMW typically increases at a steady rate each April, Cameron pledged that living wage growth would be purposefully accelerated to reach 60% of median UK earnings by 2020.

Unfortunately, the government fell short of that goal. Three years (and four prime ministers) later, annual basic wages have risen by a record amount, leaving the NLW to pale in comparison. After the Labour government came into power in July 2024, the latest Autumn budget announced that the NLW would increase by 6.7% from April 2025.

But while this change might look like a positive for employees, businesses were quick to hit back at the announcement. Hospitality and retail businesses in particular were unhappy with the government’s decision and shared concerns about raising prices for customers, job losses or even being forced to close. Moreover, if these increases create too much financial strain for a business, it may have to look into cost-cutting measures, including hiring freezes, layoffs or temporarily stopping perks and benefits.

What is the Real Living Wage?

The National Living Wage and National Minimum Wage are the base salaries that a company must legally pay its staff. However, campaigners argue that the current rates are still low, which is why some companies have elected to pay staff a more generous Real Living Wage (RLW).

While the NLW is tied to average annual salaries, the Real Living Wage is determined by the Living Wage Foundation and is based on the cost of living. Consequently, it is a more accurate reflection of the amount of money a person has to earn to cover basic living expenses today.

Rates are updated each October and are currently set at £12.60 per hour. So far, over 15,000 UK businesses have signed up to become accredited RLW employers.

London Living Wage

The RLW for London (also just known as the London Living Wage) is set at a higher rate of £13.85 per hour. This is to accommodate London’s higher cost of living for basics like housing, food and transportation.

SMEs based in the capital, or chains who have opened a location inside the M25, should consider following in the footsteps of large employers like Tesco and Asda to raise salaries specifically for workers in this area.

Should I pay the Real Living Wage?

In a competitive market, a good salary is essential for attracting and retaining staff. Working for a Real Living Wage employer is a particular selling point for job seekers as it promises a stable salary with regular pay reviews; one of the most sought-after employee benefits.

There is also growing evidence that paying the Real Living Wage can be good for a company’s bottom line. Studies have shown that companies that pay the RLW have lower staff turnover, as workers feel more motivated to stay in the role and enjoy its pay perks.

In a survey of 546 UK businesses, conducted at the end of last year, Startups uncovered that 33% of businesses plan to increase employee wages in 2025.

As pay wins dominate the news headlines, organisations should be prepared for employees asking for a pay rise this year to bring their salaries in line with wage inflation.

Considerations for adopting the Real Living Wage

Becoming a Real Living Wage accredited employer is about more than just bragging rights. It’s an important value proposition for prospective employees, telling them that you care about their financial wellbeing and are willing to go the extra mile to support them.

The investment will backfire if this support is then pulled down the line. Brewdog found that out earlier this year when it relinquished its Real Living Wage status, citing the hospitality pay crisis that has left 19% of firms unable to meet employee wage expectations this year.

The move proved to be a real beer spill for the Scottish brewer. Critics said it showed hypocrisy on Brewdog’s part and a lack of empathy for its low-earning workforce.

This is why commitment to the Real Living Wage is not to be taken lightly. Employees on the RLW will earn approximately £1,092 a year more than a worker on the NLW (and £3,334 more than a worker on the London Living Wage). This is a great bonus for employees, but it’s also a significant cost burden for employers.

Crunching the numbers is key. Curious business owners should first complete a cash flow forecast to test how adopting the Real Living Wage might impact budgets long-term.

Keen to learn more about implementing pay rises? Visit our guide to conducting pay reviews at your business.