Why a minimum wage change might not mean more money in your pocket

Chancellor John Healey is seemingly poised and primed to make a minimum wage announcement in the Budget, but if he doesn’t add one more change to the announcement it could see some people simply paying more taxes.

In the Autumn Budget, Chancellor John Healey is expected to increase adult minimum wage by nearly four percent. While this could see the rates hitting £13.20 an hour, some people might find their raise being clawed back in taxes unless he announces a second change too.

What is minimum wage?

National Minimum Wage rates is the lowest amount workers are entitled to per hour.  In the UK, there are a few different rates depending on your age and work.

The National Living Wage is the minimum amount for workers aged 21 and over while the national minimum wage usually refers to workers aged between 18 and 20.

Both amounts increase each year, and exactly how much they rise is usually announced in the Autumn Budget. In the last Budget, former Chancellor Rachel Reeves made an effort to close the gap between the two rates by increasing the minimum wage by twice as much as the national living wage.

National Wage rates until March 31, 2027:
National Living Wage (21 and over) - £12.71
National Minimum Wage (18-20) - £10.85
16-17 year old minimum wage - £8
Apprentice rate - £8

What change could John Healey make to minimum wage?

Chancellor John Healey is expected to announce a rise of 3.5% for the National Living Wage, which would increase it to £13.20. For the second year in a row the minimum wage for 18-20 year olds is expected to be more than the National Living Wage increase, with 3.9% raising it to £11.27 per hour.

This will continue to work towards fulfilling Labour’s manifesto commitment to scrap the age bands on minimum wages, so that 18 to 20 year olds are paid as much as their counterparts over the age of 21.

Why a minimum wage rise might not mean more money in your pocket?

A minimum wage increase will see millions of people getting pay rises on paper, however, for some this could see their income tax bills rising too unless Healey also announces a change to the personal allowance.

Personal Allowance is a standard amount of money most people in the UK can earn each year before being charged income tax. The current personal allowance is £12,570, but it’s been stuck at this exact number since 2021 like the rest of the income tax rate bands.

While inflation and minimum wage has been increasing every year, these thresholds have stayed exactly the same, squeezing people into higher income tax bills even if their wages are only keeping up with inflation.

Many experts have dubbed this a ‘stealth tax’ as people end up paying more income tax despite having the same spending power.

For example, if you are working 35 hours a week on minimum wage you would be earning around £22,000 per year and your income tax bill would be roughly £1,934.50 a year. However, if your income increased to £30,000 a year, your income tax would also increase to nearly £3,500 unless your personal allowance increases.

Additionally, the suspected 3.5% increase will only just match the latest inflation figures, meaning any additional cash that does land up in your pocket may be quickly spent on an increased cost of living.

There is a lot of speculation that Healey might increase the personal allowance, especially given that the state pension will exceed £12,570 from next year putting pensioners in a tricky tax situation.

A pay rise is always welcome, but what really matters is how much extra money makes it into your bank account after tax, National Insurance and the rising cost of everyday essentials.

The Budget is a good excuse to give your finances a once-over, particularly if your wages have changed. Check your payslip to make sure you're on the correct tax code, see whether you're claiming any tax relief you're entitled to, and consider whether pension contributions could help reduce your taxable income. If you're eligible for Marriage Allowance, you could also save on your household's tax bill.

And remember, while putting money into an ISA won't reduce the income tax you pay on your wages, it can protect interest and investment returns from tax. You don't need to wait for the Chancellor to make changes to start making the most of the money you've already earned.