Tax credit cuts 'will leave many workers worse off despite National Living Wage'

The proportion of workers classed as "low paid" is set to fall to its lowest level since 1985 by 2020, but many households will still find themselves worse off because of cuts to tax credits, a think-tank has found.

George Osborne's announcement of a compulsory National Living Wage (NLW), which will rise to around £9 an hour by 2020, will make inroads into the number of people classed as in "low pay", meaning they are on less than two-thirds of median hourly earnings.

But the Resolution Foundation report said that although the NLW will reduce the extent of low pay across Britain from 21.4% in 2014 to 18.8% by 2020, it will have a far more limited impact on raising the living standards of low-income households.

While the NLW will limit the income losses stemming from welfare cuts announced alongside it in the Chancellor's Budget in July, it will not make a considerable difference.

The losses faced by households in the bottom half of the income distribution will be reduced by just 13%, the report found.

The think-tank warned that the Budget weakened work incentives and reduced incomes for many low-income households, despite the increase in pay.

The report found that the number of employees earning less than the voluntary living wage - currently £7.85 per hour or £9.15 in London - is set to rise to a record 24%, or 6.5 million employees, next year.

The report found 27% of women were low paid, compared with 17% of male employees.

Employees in the East Midlands are most likely to be low paid, with 26% below the threshold, while workers aged 30 and under are more than twice as likely to be low paid - on 38% - as those aged 31-60, 15% of whom are below the threshold.

Matthew Whittaker, chief economist at the Resolution Foundation, said: "Britain's low pay landscape is set to be transformed over the next five years by the new higher wage floor. The significant fall in low pay over the next five years will be very welcome after two decades of standing still.

"But a change of this magnitude won't be without big challenges and government must work closely with both the Low Pay Commission and employers to ensure that the national living wage is implemented successfully, and avoids unintended consequences.

"And while it is welcome to see progress being made on low pay, the wider picture on living standards is more troubling. Many working households will find themselves worse off, even as the national living wage improves their pay, as a result of the tax credits cuts announced alongside it.

"It's important the Government doesn't miss the bigger picture on living standards."