Ed Miliband pledges living wage tax breaks for firms

Some of Britain's lowest-paid workers could get pay rises under plans drawn up by Labour leader Ed Miliband.

If the party wins the next election, Mr Miliband plans to offer firms a 12-month tax break in 2016 if they agree to pay the so-called "living wage".

The pledge was cautiously welcomed by business groups, but there were fears many firms would find it unaffordable.

The government said it encouraged firms to pay their lowest paid staff more provided it did not cost jobs.

The living wage is an informal benchmark based on the amount an individual needs to earn to cover the basic costs of living. It is set at £8.55 an hour in London and £7.45 an hour in the rest of the UK.

The national minimum wage, set by the chancellor, is significantly lower at £6.31 an hour for adults, and £5.03 for those aged 18 to 21.

Under the proposals put forward by Mr Miliband, private firms would be able to claim back about a third of the cost of raising their staff members' wages to the living wage - amounting to £445 a year on average per worker, although it could potentially reach £1,000.

Labour claims the plan will save money because benefit bills would go down and tax revenues would increase.

But costs to businesses would rise as a result of signing up. And those that do so could only claim the money back for one year.

Conservative former chancellor Ken Clarke said Mr Miliband's proposals were ill-judged "electoral bribery" that employers and the economy could ill afford.

"It isn't quite free beer for the workers but it is electoral bribery really, and [Mr Miliband] is quite incapable of understanding how a country in an acute financial crisis, with an enormous fiscal deficit, can possibly afford this," said the cabinet minister.

Conservative chairman Grant Shapps added: "Labour got us into a mess with too much borrowing and too much debt and now they're calling for yet more borrowing and more debt."

The government said it encouraged employers to pay above the national minimum wage "when they are profitable and when it's not at expense of jobs".

It said ministers were doing everything they could to "help people on low pay with the cost of living".

The living wage announcement comes ahead of a speech on Tuesday in which Mr Miliband is expected to say that tackling low incomes is key to solving squeezed living standards.

He is expected to warn that Britain risks "an era of growth without prosperity" as wages stagnate while household costs continue to rise.

He will add: "Low wages aren't just bad for working people and their families. They are driving up the social security bill too, as the country has to subsidise more and more low paid jobs with tax credits and benefits.

"So to those who say we can't afford to do anything about wages in our country today: I say we can't afford not to."

Katja Hall, chief policy director for the Confederation of British Industry, said the scheme may help some firms pay more, but many companies simply could not afford it.

"The best way to boost wage growth in the longer term is to build a sustainable recovery and invest in the productivity growth that will boost wages," she said.

The Federation of Small Businesses said it was an "interesting proposition" but said a national insurance exemption next year could help firms increase pay sooner.

The Living Wage Foundation, which encourages companies to set wages which reflect the cost of living, said paying the higher rates was necessary.

The Foundation, which was set up by community group Citizens UK, runs the long-running living wage campaign backed by charities, trade unions and businesses for the introduction of a living wage.

Rhys Moore, the group's director, said: "With working poverty on the rise, paying a living wage is becoming a must for every responsible employer.

"We are working with businesses across the UK to help them do the right thing, so that from the chief executive to the cleaner, hard work pays."

But RMT union leader Bob Crow said: "Poverty pay should not be an option and the only solution is to raise the statutory minimum wage to the current living wage rate."

Updated living wage rates are due to be announced on Monday. The UK rate will be announced by Bishop of Nottingham Paul Butler, while the London rate will be set out by London Mayor Boris Johnson.

It comes as it emerged the number of people paid less than the living wage grew from 4.8 million to 5.2 million in the last 12 months, according to the consultants, KPMG.

And the number of children living in households earning less than the living wage has increased from 1.82 million to 1.96 million, according to research by Save the Children.