National Living Wage Explained

Budgeting for employee salaries in a small business can be confusing, especially when pay rates keep changing. 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 the 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.

Increases in National Living Wage and National Minimum Wage

Following the Labour government’s announcement of the 2024 Autumn budget, the NLW has since increased by 6.7% to £12.21 per hour from April 2025.

Meanwhile, the NMW has increased from £8.60 to £10 per hour for 18-20-year-old workers, as well as from £6.40 to £7.55 per hour for apprentices.

This article will cover:

National Living Wage rates for 2025
National Living Wage: legal requirements
Why was the National Living Wage introduced?
What is the Real Living Wage?
Should I pay the Real Living Wage?

💡Key takeaways

As of April 2025, the current National Living Wage (NLW) in the UK is £12.21 per hour.
By law, employers are required to pay a minimum wage to their staff, including agency staff, part-time employees and zero-hour contractors.
You must check with a payroll service expert whether your salaries, bonuses and/or commissions comply with legislation.
You could face a fine of £20,000 if you fail to pay the NLW and NMW rates.
The Real Living Wage is voluntary and not run by the government, and is currently at £12.60 per hour (£13.85 for London-based staff).

National Living Wage rates for 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

Year	National Living Wage
April 2025 (21 and over)	£12.21 p/h
April 2024 (23 and over)	£11.44 ph/h

New rates for National Minimum Wage

Age	18 to 20	16 to 17	Apprentice
Hourly wage	£10 p/h	£7.55 p/h	£7.55 p/h

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
Zero-hour contract employees
Part-time employees

Only sole traders and volunteers do not qualify for the NLW.

Failure to comply with the new National Living Wage and National Minimum Wage could result in a fine of up to £20,000 per worker.

Companies must also 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.

How often does the NLW change?

Both the NLW and NMW typically increase at a steady rate each April. 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.

The impact of wage increases on businesses

While this seemed to be a positive change 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.

Other concerns were around the possibility of looking into cost-cutting measures, including hiring freezes, layoffs, or temporarily stopping perks and benefits. At the time, 70% of hospitality businesses said that they planned to reduce employment as a result of these costs.

What is the Real Living Wage?

The Real Living Wage (RLW) is a voluntary hourly pay rate set by the Living Wage Foundation and is based on the cost of living. Unlike the National Minimum Wage and National Living Wage – which are legally mandated by the government — the RLW reflects what people need to earn to afford everyday essentials (e.g. rent, food, transport, etc.).

RLW rates are usually updated each October and are currently set at £12.60 per hour. According to the Living Wage website, over 16,000 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 currently 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 that 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 benefits for 72% of UK employees.

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.

Brewdog scraps RLW

Brewdog came under fire last 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.

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 case shows why commitment to the Real Living Wage is not to be taken lightly, and why businesses should only adopt it if they can sustain it long-term.

Full-time employees (around 39 hours per week) on the RLW can earn approximately £2,262 a year more (around £4,900 more for London-based staff). 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.

Summary

With wage rates shifting and legal requirements tightening, getting payroll right in 2025 is more important than ever.

Whether you’re sticking to the National Minimum and Living Wage, or thinking about going the extra mile with the Real Living Wage, it all comes down to what’s sustainable for your business.

Paying fairly isn’t just about compliance – it can also help you attract great people and keep them around longer. Even so, the Real Living Wage is a bigger financial commitment, so it’s important to weigh up the costs before making that decision, so that both your team and your company’s financial position are looked after.