New Living Wage rates - how are they calculated?

Reward Heads is an accredited Living Wage employer and so we were given the heads up a few weeks ago about where this year’s rates would land and all asked to keep it under our hats until today’s announcement.

They have announced that the new Living Wage will be £12.60 (up 60p or 5%) with London Living Wage at £13.85 (up 70p or 5.3%)

Reward Heads have clients, especially in the Third Sector, who are accredited and more who are mindful of the Living Wage rates whilst few are accredited.

As every year, this will no doubt cause confusion with the National Living Wage (NLW) which will be announced in the Budget on 30th October. Given the Government have announced that NLW will reflect cost of living going forward, one question explored was whether the NLW would be basically moving to become Living Wage. In fact cost of living is only one element of the NLW and the Living Wage foundation are not expecting their methodology to be used by the Low Pay Commission (LPC).

So how do LW Foundation come up with their figures? It is seen as one of the most advanced methodologies on cost-of-living benchmarking globally.

They use a Minimum Income Standard (MIS) which is research done by Loughborough University every two years.

They define an acceptable standard of living: the MIS of core items plus separate costs for London and rest of UK on housing, childcare, travel and council tax

They then look at the net income that families need to afford this – they have to make assumptions on taxes and benefits and also on hours worked  - a key change has been not assuming that people are working full time (2nd earners and single parents now assumed at 24 hours). They look at 17 different family types as the needs of single parents with 3 children would be different to, say, dual income couples with no kids. They then take a weighted average based on household numbers and come up with the hourly rates for London and rest of UK.

There are 3 main elements impacting this year

-        Inflation – this has returned to typical levels of 2% - in fact the CPI fell to 1.7% for the 12 months to September 2024

-        Upward pressure on the MIS (and the change to working hours assumption noted)

-        A cap of 3% either side of inflation

 So looking at the MIS – this is based on detailed research with they perform every 2 years using focus groups and they use TESCO prices as the UK biggest supermarket and hence most accessible

Note that it is a minimum ACCEPTABLE income not minimum possible, which would be subsistence, but far from a luxury lifestyle

So for example it includes:

-        4 family meals out a year at £90 a time - that is just once every 3 months so for birthdays and major events

-        Broadband at £20 / month - for many this is a necessity

-        One UK holiday for a week - they use Butlins pricing

They have noted that activities for children have become more expensive and notably food prices have rocketed - they are 21% above general inflation compared to 2021.

This would have led to a big jump had the cap not been in place – year on year changes are limited to not more than 3% either side of inflation.

And that there will still be some catching up in future years so even with 2% inflation, we can still expect the LW to go up 5% for the next year or two

They expect the gap to NLW to still be around 50p and not close completely as the basis is different –cost of living is part of the calculation, and the new Government have been more explicit about that, but there is also a ‘negotiation’ with employers and unions. It remains to be seen on October 30th exactly what the Chancellor announces as the new NLW (and NMW) rates but central estimates from the Low Pay Commission are currently £12.10.

Reward Heads know that Living Wage and National Living Wage are key topics for our clients and forum groups and so have two forums planned in early November once employers have had a chance to digest all the numbers and think about their positioning on pay for 2025.

If you are Reward in Retail or Hospitality and would like to join us at the forum for those sectors, the date is Wednesday November 6th.

For the charity and wider Third sector, it is Wednesday November 13th.

If you have not already had a Teams invite, please email Marcus@rewardheads.co.uk