The national minimum wage will push above £5 for the first time this autumn, according to Trade and Industry Secretary Patricia Hewitt.
The rate for those aged 21 and over will be £5.05 from October, a 20p increase from the current rate of £4.85.
Hewitt also announced there would be a further 6% increase to £5.35 in October 2006.
"Despite predictions to the contrary, the national minimum wage has not affected the job prospects of low-paid workers in the UK," she said. "Unemployment is at a record-low, with 28 million people now in work."
The minimum wage youth rate, which applies to 18-to 21-year-olds, will increase to £4.25 in October and £4.45 a year later.
A British Hospitality Association spokesman said: "The increase in the national minimum wage was in line with what we expected."
by Chris Druce
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