A compulsory living wage of £7.20 an hour will be introduced in April 2016 for workers over the age of 25, the government announced this week.

Chancellor George Osborne revealed in the summer Budget that the current minimum wage of £6.50 for workers over 21 will be replaced with the new “National Living Wage,” which is projected to reach £9 an hour by 2020.

The chancellor said:

“Let’s be clear what it means for the low paid in our country. Two and a half million people will get a direct pay rise. Those currently on the minimum wage will see their pay rise by over a third this Parliament, a cash increase for a full time worker of over £5,000.

“In total it’s expected that 6 million people will see their pay increase as a consequence.”

While the benefits of higher wages are clear from an employee point of view, many feel that smaller businesses will suffer as a result.

The Office for Budget Responsibility (OBR) said the compulsory pay increase would cost 60,000 jobs as a direct consequence, although it predicts there will be a million more positions in total.

Kevin Poulter, legal director in the employment team at law firm Bircham Dyson Bell, said:

“For small businesses and entrepreneurs, the impact of increased wages (however the new ‘living wage’ may be introduced and enforced) as a way to fill a benefits void may limit future growth. The threat of an increased wage to £9 an hour by 2020 may also see some resistance, in spite of an National Insurance employment allowance for small firms increasing by 50 percent (to £3,000) from 2016.”

Lee Biggins, managing director of recruitment site CV-Library, said:

“The introduction of a National Living Wage is likely to oppose [other] positive changes. Despite it being a good introduction for those in low-paid jobs, it is likely to cause a contraction in job growth due to the increased funds that businesses will need to invest in higher wages.”

Peter Boreham, principal in Mercer’s Talent business, said:

“While the move is broadly to be welcomed, the timing of this initiative is a little unhelpful. Companies have already absorbed increases to the previous Minimum Wage over the last 5-6 years that have noticeably exceeded median market increases for other staff. They have also suffered cost increases on the back of the recent ruling that holiday pay should include overtime, and the introduction of pension auto-enrolment.

Whilst the corporation tax reduction will help to fund the change, it may not be sufficient for companies with a high proportion of lower paid staff.  Finally, there is a danger that this increase to fixed costs might damage employment if the economic environment becomes less benign or if competition from low wage economies and technology intensifies.”

Workers under the age of 25 will continue to earn the National Minimum Wage, which will increase to £6.70 this October.