Why Governments Love Raising the Minimum Wage – Because it’s Really a Tax

In a previous article, we examined how the minimum wage works in practice. Higher, more comfortable pay for easier and lower-skilled jobs attracts capable, energetic workers into those roles, displacing the genuinely low-skilled from the labour market and trapping them on benefits. These effects are neither subtle nor controversial. They are visible everywhere.

And yet, year after year, chancellors of all parties have pushed the minimum wage higher – not merely in line with inflation, but far beyond it. By April 2025, the annualised minimum wage had risen to £25,500, around 60% higher in real terms than when the policy was introduced in 1999.

One can see why Labour governments, committed to equality whatever the consequences, favour such increases. But Conservative governments have overseen them too – raising the minimum wage by around 20% in their final two years in office. To understand why, we need to look not at rhetoric, but at how the minimum wage works in practice, both for workers and for government finances.

The missing piece is Universal Credit (UC). Low-paid workers do not live on their employer’s wage alone. Many receive UC on top of their pay, delivered directly into their bank accounts. UC is a generous benefit, making a real difference to the standard of living of many low-paid workers. But it comes with a sting in its tail: a withdrawal rate of 55%. For every additional £10 a worker earns, £5.50 is taken away through reduced UC.

Out of roughly 33 million people in employment, nearly three million are on UC while working. Of these, around two million are on or close to the minimum wage.

In April 2025 the minimum wage rose by 7%, from an annual wage of £23,900 to £25,500 – about £1,600 more a year. That makes a fine headline. But it is not just those on the minimum wage who receive increases. Employers must raise the pay of other lower-paid workers by a similar amount to preserve incentives for skill, experience and responsibility.

Now look at what actually happens to that £1,600 increase for the two million lower-paid workers affected.

The pay rise costs the employer £1,840 once Employer’s National Insurance is included.

The worker immediately loses £880 as UC is withdrawn at 55%.

Income tax takes a further £320.

National Insurance takes another £130.

The result is stark. Out of a supposed £1,600 pay rise, which costs the employer over £1,800 to provide, the worker keeps £270, just a sixth of the claimed pay increase.

Where does the missing £1,600 go? To the government.

When the minimum wage rose to £25,500 in April 2025, it increased take-home pay for roughly two million low-paid workers by about £5 per week, while delivering around £3 billion in additional revenue to the government from employers. And so the minimum wage rises again in April 2026, this time to £26,528.

This is why politicians love announcing minimum-wage hikes. They sound generous. They cost the government nothing directly. And they allow ministers to pose as champions of working people.

In reality, the minimum wage has become a payroll raid. It destroys marginal jobs, traps workers in dependency and quietly expands the state’s take – all while pretending to do the opposite.

The minimum wage is not a workers’ policy. It is a tax-raising policy – and a foolish one at that. By its very nature, increases in the minimum wage are inflationary. There may be no explicit tax labelled ‘working people’, but the costs are passed on to everyone through higher prices for goods and services. Like any payroll tax, the minimum wage raises the cost of labour, reduces employment at the margin and hits hardest when the economy weakens. When downturns arrive, it is the most vulnerable workers who suffer most – not through lower pay, but through lost jobs. What appears to be an efficient tax take in good times ultimately misfires: the revenue gained upfront is outweighed by the tax lost when unemployment inevitably rises.