Watch: Budget 2021: Living wage and minimum wage increases to be announced in Wednesday's budget
The chancellor is set to increase the national living wage to £9.50 in Wednesday's budget.
It will rise by 6.6% from the current living wage of £8.91 per hour for those aged 23 and over from 1 April, which the government says will give full-time workers an extra £1,000 a year.
The national living wage is what the government has called the national minimum wage for anybody above 22-years-old since 2016.
Those below that age are eligible for what is called the "national minimum wage", which will also see a rise.
People aged 21-22 will see an increase to £9.18 an hour from £8.36 and apprentices, who must be aged 16 or over and not in full-time education, will get a rise to £4.81 from £4.30 an hour.
However, the chancellor has made no announcement on other age groups, with under 18s currently getting £4.62 an hour and 18 to 20-year-olds getting £6.56 an hour.
Despite its name, the national living wage is not based on the true cost of living, however, increasing it to £9.50 an hour brings it closer to the actual living wage of those outside London, according to the Living Wage Foundation.
The independent campaign organisation says the living wage inside London is £10.85 an hour but is set to rise in November for the capital and the rest of the country.
Chancellor Rishi Sunak said: "This is a government that is on the side of working people. This wage boost ensures we're making work pay and keeps us on track to meet our target to end low pay by the end of this parliament."
And chief secretary to the Treasury Simon Clarke told Sky News that the rise is an "really important protection" against the current cost of living pressures and shows government is "on the side" of working families.
"We're confident this is a really big step to make sure that work always pays," he said.
Criticism the rise is not enough - as others say it will hit small businesses
The Institute for Fiscal Studies said much of the increase in the living wage would be eaten up by inflation.
Senior research economist Tom Waters said: "First, while this boosts earnings for full-time minimum wage workers by over £1,000 per year, those on Universal Credit will see their disposable income go up by just £250 because their taxes rise and benefit receipt falls as their earnings increase.
"Second, minimum wage workers are most heavily concentrated around the middle of the household income distribution - not the bottom - often because they live with a higher earning partner. That means that the minimum wage is a very imperfect tool to offset cuts to benefits, which are much more targeted at the poorest households.
"Third, rising inflation will also blunt the real-terms value of this minimum wage hike - and of course while prices are rising now, the increase in the minimum wage won't kick in until April."
Labour's shadow chief secretary to the Treasury Bridget Phillipson called the rise "underwhelming".
"This underwhelming offer works out at £1,000 a year less than Labour's existing plans for a minimum wage of at least £10 per hour for people working full-time," she said.
"Much of it will be swallowed up by the government's tax rises, Universal Credit cuts and failure to get a grip on energy bills."
Graham Griffiths, director of the Living Wage Foundation, welcomed the increase but said when the foundation announces the new actual living wage next month there will be a "substantial gap" between the new living wage and the real living wage thanks to fuel and energy price rises and cuts to household incomes.
He said: "We all need a wage that provides a decent standard of living. If we're to recover and rebuild over the coming months and years, we'll need to see more employers commit to go beyond this new government minimum, do the right thing, and commit to pay a real living wage."
The Federation of Small Businesses (FSB) said every worker whose pay increases to £9.50 an hour will have to pay taxes of almost £500 so said there needs to be support for the smallest employers in the form of an extension of the small business employment allowance, which covers the first £4,000 of employer national insurance contributions.
Watch: Budget 2021: There are still more questions than answers over the end of public sector pay freeze
FSB national chair Mike Cherry said: "Without an increase in the employment allowance, the combination in April of higher wage bills and higher tax bills will see many more than the forecast of 50,000 people added to unemployment queues.
"After pre-briefed announcements to help the banks with their tax bills, and to help international companies to invest here, there needs to be a clear offer from this government to small businesses, too.
"Increasing the employment allowance, alongside reforming of upfront costs such as business rates, are the most important reforms called for today by the UK's small business community."
Dr Mat Johnson, senior lecturer in employment studies at Alliance Manchester Business School, told Sky News the 6.6% rise is "quite modest" because inflation is expected to hit 5% early next year.
He added that the rise coincides with the removal of the £20 Universal Credit uplift and "fails to recognise the sharp clawback of earnings" for those working and claiming Universal Credit as they will have higher tax and National Insurance contributions.
The Treasury said the changes mean the government is accepting all recommendations made by the Low Pay Commission independent advisory board.
Follow budget coverage live on Sky News on Wednesday with the chancellor's announcement from 12.30pm