Rachel Reeves has given young workers a record ￡2,500 pay rise, despite warnings from businesses that the move will harm Britain’s competitiveness.

       The Chancellor has approved a 16 per cent increase in the minimum wage for 18 to 20-year-olds, taking it to ￡10 an hour.

       She has also signed off a 6.7 per cent increase to the National Living Wage, earned by all over-20s, meaning they will pocket ￡1,400 more. Business leaders warned that the move would “undermine competitiveness” and force firms to cut investment.

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       Under the changes, 18 to 20-year-olds on the National Minimum Wage will see their pay rise from ￡8.60 to ￡10 an hour from April.

       The 16 per cent rise is the start of Ms Reeves’ longer-term plan to move younger workers onto the same level of pay as their elders.

       More than three million workers on the National Living Wage will see their hourly wage go from ￡11.44 to ￡12.21, a wage rise more than three times higher than inflation.

       It comes after Ms Reeves instructed the Low Pay Commission to include cost of living factors when calculating increases to the minimum wage.

       The Chancellor said: “This Government promised a genuine living wage for working people. This pay boost for millions of workers is a significant step towards delivering on that promise.”

       Angela Rayner, the Deputy Prime Minister, said: “A proper day’s work deserves a proper day’s pay. Our changes will see a pay boost that will help millions of lower earners to cover the essentials as well as providing the biggest increase for 18 to 20-year-olds on record.”

       The move will add to tensions between the Government and businesses, which have erupted over Ms Rayner’s plans to boost workers’ rights.

       Industry leaders have warned that the package, which includes day one rights to take companies to court for unfair dismissal, will make the UK a less attractive place in which to invest.

       Firms are also braced for a battering in Wednesday’s Budget, including a two per cent increase to employers’ National Insurance contributions.

       John Foster, of the Confederation of British Industry, said: “Politicians and businesses are united in wanting to ensure people have access to well-paid, fulfilling work. But with productivity stagnant, businesses will have to accommodate this increase against a challenging economic backdrop and growing pressure on their bottom line.

       “That pressure will make it increasingly difficult for firms to find the headroom to invest in the tech and innovation needed to boost productivity and deliver sustainable increases in wages.”

       Mr Foster said revitalising business investment was “the key to unlocking productivity gains and driving sustainable wage rises across the economy”, adding: “Achieving this shared goal requires business and government to work together to find a long-term solution to inactivity and the wider labour costs undermining competitiveness.”

       Kate Nicholls, the chief executive of UKHospitality, said the announcement would add ￡1.9 billion to the wage bills of struggling pubs and restaurants.

       She added: “Trying to balance the books from the pockets of high street businesses will simply leave hospitality as collateral damage, threatening jobs, future investment, price increases for consumers and business viability.

       “Our companies desperately want to be able to support higher wages for staff – but what is being asked of them is simply unsustainable if taxes are going to shoot up at the same time.”

       Britain’s largest trade union also sounded the alarm over the increase, warning that it could even lead to an exodus of workers from the NHS. Unison said the huge rise in the living wage meant it was now higher than the minimum wage paid to many health service staff.

       Jon Richards, the assistant general secretary, said: “This much-needed boost will see millions of workers struggling a little less from next spring. But as it stands, the new legal minimum is more than the current lowest hourly rate in the NHS, universities and some other public services. This will give employers multiple headaches.

       “To avoid this in the NHS, the government should ditch the outdated pay review body process and start talks with unions now. This will ensure wages remain competitive for all employees, so staff don’t leave the NHS.”