Raising the Minimum Wage Brings Maximum Results

This report is an excerpt from CNBC's UK Exchange newsletter this week. Is it like what you see? You can subscribe here.

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Although her next Budget is just three weeks away, weary political commentators are already betting on some of the measures Britain's Chancellor of the Exchequer Rachel Reeves will announce.

One is to freeze the base income tax rate and the threshold at which people start paying higher income tax rates.

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

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

This would confirm that the UK has the highest statutory minimum wage in the world, lower than Australia and New Zealand but higher than peers such as France and Germany and notably ahead of Japan, the US and Canada.

This is already having an impact on the wider economy. The NLW increased to 12.21 in April, increasing employer national insurance (payroll tax) and reducing the level at which payroll tax is applied. This has led to sharp increases in employment costs and the loss of jobs, particularly in the hospitality sector. The number of salaried employees in the UK fell by 115,000 between August 2024 and August this year. These moves also contributed to rising inflation.

UK Chancellor of the Exchequer Rachel Reeves attends a roundtable discussion during a visit to the British Steel site in Scunthorpe, England, April 17, 2025.

WPA Pool | Getty Images News | getty images

But wage increases expected this month could have another impact. According to the Financial Times, many employers are concerned that after the expected increases, NLW employees will receive salaries closer to the typical starting salaries of graduate students in professions such as accounting, law and finance.

The paper quoted one chief executive as saying, “Why should young people take on $45,000 in student loan debt if they can earn the same amount?”

This dynamic threatens to shake up the traditional assumption that a college degree guarantees better jobs and higher incomes. These assumptions underpinned the massive expansion of university education launched by former Prime Minister Tony Blair. Blair found that in 1999, 50% of school leavers wanted to go to university, compared to about a third at the time. That goal was achieved in 2019.

But going to college has become much more expensive. This is because the cost of higher education is transferred from the state to individuals through tuition fees. This was set at 1,000 per year when introduced by Prime Minister Blair in 1998, and has since been raised to 9,535 per year in England (in Wales and Northern Ireland this amount is lower and Scottish students studying in Scotland pay no tuition fees). Most students take out loans to repay these fees, which now become repayable once a graduate's salary reaches 25,000. These repayments are 9% of salary and effectively act as a graduation tax.

So not only is the national living wage increase out of sync with the starting salaries of professional graduates, but a graduate earning the same salary as someone in the NLW will actually end up taking home less money if they take out student loans.

On the other hand, graduate school jobs are decreasing. The Institute of Student Employers reported last month that large graduate employers have reduced hiring for the second year in a row, with hiring down 8% in the most recent academic year alone. Three of the UK's four largest accountancy firms (PwC, EY, KPMG and Deloitte), which traditionally recruit the most new recruits, have reduced recruitment even further.

So will this lead 18-year-olds to leave college and pursue careers, apprenticeships and even entrepreneurship?

Graduate school salary premium?

The current Prime Minister, Keir Starmer, made it clear that this was his goal in September when he trashed Blair's goals as “unfit for our times”. Instead, he wants two-thirds of students leaving school to go on to university, further education or a “gold standard apprenticeship” by the age of 25 – one ending with a technical qualification.

This emphasis on education and skills is a big change in tone, but manufacturers in particular doubt whether training can be delivered after years of courses being closed at further education colleges. The imposition of a 0.5% apprenticeship tax on employers with annual payrolls of more than $3 million in 2017 was intended to fund more skills training, but instead led large employers to focus on existing employees rather than new ones. The number of apprentices has fallen by a third since 2015, while engineering apprenticeships have fallen by 40% since 2017.

Despite placing a greater premium on skills, one leading engineering employer now says it offers skilled welders a salary of $90 an hour. There is little evidence that 18-year-olds graduate from college. The University Admissions Office (UCAS) reported in February that a record 600,660 people applied to university for the new academic year, a 1% increase on 2024-25.

And while the graduate wage premium has declined, it still exists. The Policy Institute at King's College London and the Resolution Foundation, a centre-left think tank, reported in January that a bachelor's degree is worth an average of $280,000 extra for men and $190,000 for women compared to their lifetime earnings if they had not gone to university.

So perhaps the current concerns are overblown. Logic dictates that NLW workers are likely to maintain or get close to this wage in most cases, and graduates who enter a profession like accounting can expect significant pay increases as their careers progress.

So while a rise in the national living wage could reshape Britain's jobs market and universities, universities already struggling financially due to over-expansion do not expect immediate change.

Ian King

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Britain's shadow Chancellor of the Exchequer, Gareth Davies, said Chancellor Rachel Reeves' criticism of his Conservative party's timing in power was “a little rich”.

Carsten Nickel, Managing Director at Teneo, discusses British Prime Minister Rachel Reeves' surprise speech from Downing Street on Tuesday.

Ryanair chief executive Michael O'Leary has criticized the UK government, warning of tax hikes on the aviation sector and saying Prime Minister Rachel Reeves has “no idea how to get growth”.

holly elliot

What you need to know

In the UK, Reeves addressed speculation about tax rises in an unusual pre-budget speech. British Prime Minister Rachel Reeves addressed speculation about her financial plans and told the British public that her budget would focus on “fairness and opportunity” but that there were “pressures on public finances” that needed to be faced.

Cyberattack on Jaguar Land Rover raises questions about UK preparedness. On September 2, JLR reported that it had experienced a ‘cyber incident’. The Cyber ​​Monitoring Center estimated that the attack cost the UK ₹1.9 billion ($2.5 billion).

Shell announced share buybacks based on top earnings estimates. The British oil giant reported Thursday adjusted earnings of $5.4 billion for the quarter, higher than the $5.05 billion expected by analysts, according to LSEG. It also announced $3.5 billion worth of stock buybacks over the next three months.

Jeon Yeopping, Holly Elliot

Quote of the week

If a government is foolish enough to tax mobile assets like aircraft or air travel, it's a zero-sum game in motion. If they were stupid enough to tax wealth here in the UK there would be no movement of wealth.

Michael O'Leary, Ryanair CEO

in the market

London's FTSE 100 index rose slightly last week, up about 0.1% in the seven days to Tuesday's close. British investors were focused on corporate earnings as London-listed companies including HSBC, GSK and oil majors Shell and BP all reported.

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Performance of the Financial Times Stock Exchange 100 Index over the past year.

Meanwhile, UK 10-year government bond yields, known as gilts, were volatile on Tuesday following Reeves' surprise budget speech.

The Prime Minister addressed speculation that the ruling Labor Party would renege on its manifesto promise not to raise taxes on workers, but would not provide a definitive answer on whether a tax rise was on the cards.

Yields fell as much as 4 basis points during the speech, but the decline narrowed as she failed to provide specific guidance on what to expect on November 26.

The gold market's reaction reflected “caution after initial relief,” according to Julian Howard, chief multi-asset investment strategist at GAM Investments, who noted a “disturbing lack of detail” in the speech.

The British pound has fallen about 1% against the U.S. dollar over the past week, trading at about $1.3035 on Tuesday afternoon.

Chloe Taylor

soon

5 November: UK new car sales for OctoberNov. 6: Bank of England interest rate decision in November. 11: UK unemployment rate in September

holly elliott

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