Lowest paid employees will receive a boost as the minimum wage will be replaced a compulsory National Living Wage (NLW) from April taking the lowest rate of pay for employees aged over 25 to £7.20 per hour.
However it does not meet the level set by the Living Wage Foundation of £9.15 in London and £7.85 in the rest of the country.
Two and a half million of the lowest paid workers will see their take-home pay increase by £5,000 as a result of the changes.
Chancellor George Osborne made the announcement in the Summer Budget, where he said the NLW was intended to reach £9.00 per hour by 2020.
The Low Pay Commission will monitor the increases in the rate that achieve the government's objective of reaching 60% of median earnings by 2020.
Delivering his speech, Osborne said that the Office for Budget Responsibility predicted a net loss of 60,000 jobs due to the increase in pay.
As a result, small businesses will see an increase to their national insurance relief from £2,000 to £3,000 per year.
"They also estimate that the cost to business will amount to just 1% of corporate profits. To offset that I have cut corporation tax to 18%," Osborne said.
"Let's be clear what it means for the low paid in our country. Two and a half million people will get a direct pay rise. Those currently on the minimum wage will see their pay rise by over a third this parliament, a cash increase for a full time worker of over £5,000.
"In total it's expected that 6 million people will see their pay increase as a consequence. And taken together with all the welfare savings and the tax cuts in this Budget, it means that a typical family where someone is working full time on the minimum wage will be better off," he added.