The hourly national living wage rate for over-25s will increase from £8.21 to £8.72 for 2020/21.
The Low Pay Commission published recommendations for the new rates, which kicks in from 1 April 2020.
The national living wage is the Government’s minimum wage for over-25s. The minimum wage for under-25s will also rise.
Workers aged between 21 and 24 will get £8.20 an hour, while staff aged 18 to 20 will see their hourly rate rise to £6.45.
Under-18s will be paid at least £4.55 an hour – up from £4.35, with apprentices being paid at least £4.15 an hour.
The new Government claims the changes will put an extra £930 a year in the pockets of national living wage staff that are over the age of 25 and work 35 hours a week.
Chancellor Sajid Javid said: “This latest rise will mean that since we introduced the national living wage in 2016, the lowest paid will have had a wage increase of more than £3,600.
“We want to do more to level up and tackle the cost of living, which is why the living wage will increase further to £10.50 [an hour] by 2024 on current forecasts.”
Business groups warned of cashflow disruption to smaller employers, while calling on the Government to deliver tax cuts from elsewhere in next month’s Budget.
Craig Beaumont, director of external affairs at the Federation of Small Businesses, said: “This Government has promised a reduction in the jobs tax through an increase in the employment allowance.
“With a national living wage increase of this size now on the horizon, it’s critical that it delivers this swiftly.”
The British Chambers of Commerce (BCC) warned of fresh cashflow problems as the planned increase is four times the rate of inflation, which was 1.5% at the turn of the year.
Hannah Essex, co-executive director at the BCC, added: “Raising wage floors by more than double the rate of inflation will pile further pressure on cashflow and eat into training and investment budgets. For this policy to be sustainable, the Government must offset these costs by reducing others.”