Tina McKenzie, of the Federation of Small Businesses, said: “Any increase to the NLW must be accompanied with powerful government measures to help small businesses create and sustain jobs.
“The Employment Allowance needs a significant increase to help small businesses keep staff and build confidence when hiring new team members, and helps mitigate tough choices when it comes to recruitment in firms with very tight margins and few options.
“Our research shows small employers face difficult choices as they adapt to increases in the tax they pay, including for workers on the national living wage. Almost four in five (79pc) of small business employers say the Employment Allowance should rise in line with the NLW every year.”
Ms Reeves decision to raise the minimum wage will be based on new recommendations from the LPC which she will receive ahead of the Budget.
As part of its manifesto pledge to “make sure the minimum wage is a genuine living wage”, Labour has changed the LPC’s remit so that its recommendations account for the cost of living.
To assess the cost of living, the LPC will now incorporate measures of living standards such as inflation into its calculations.
However, economists said this was likely to have little impact on this month’s Budget as inflation has fallen steadily from its 41-year high of 11.1pc in October 2022 to 1.7pc today, well below wage growth, which was 3.8pc in August.
Eduin Latimer, research economist at the Institute for Fiscal Studies (IFS), said: “That commitment to keep rises in line with the cost of living is likely to only bind in years when inflation looks like it is going to be faster than wage growth.”
In September, the LPC said that minimum wage would need to rise by 5.8pc to maintain minimum wage at two-thirds of median hourly earnings, which is its key benchmark.
However, the LPC said that this figure could be higher. “Our central estimate may continue to rise over the rest of the year because earnings growth in 2024 so far has been stronger than forecast,” it said last month.
Mr Latimer warned that the rise in minimum wage would mean higher costs for businesses and will push them to raise their prices to cover their bills.
“The evidence so far on minimum wage increases in the UK suggests that firms have absorbed costs of high minimum wages into profits and passed them on in prices,” he said.
The Treasury was contacted for comment.