The adult rate of the minimum wage will rise later this year by 11p to £6.19 an hour, Business Secretary Vince Cable announced today.
The 1.8% rise is way below the most recent Retail Prices Index inflation figures which recorded a 3.9% rise in the cost of living in January.
It increases the annual pay for a full-time worker on 40 hours a week on minimum wage by £228.80 to £12,875.
Meanwhile, rates for younger workers will be frozen at £4.98 for 18 to 20-year-olds and £3.68 for 16 to 17-year-olds.
Apprentices will get a 5p increase in their minimum wage to £2.65 an hour (1.9%).
The changes are in line with the recommendations of the independent Low Pay Commission and come into effect on 1 October.
Cable says: "I believe the recommendations of the Low Pay Commission strike the right balance between pay and jobs, and have therefore accepted all the rate recommendations. The Low Pay Commission has done a good job in difficult circumstances.
"In these tough times freezing the youth rates has been a very hard decision, but raising the youth rates would have been of little value to young people if it meant it was harder for them to get a job in the long run."
Unison union general secretary Dave Prentis says today's announcement is "bitterly disappointing and will condemn millions of families to life on the breadline".
Prentis adds: "While the Chancellor looks set to cut income tax for the very richest, those at the bottom of the pay pile do not have enough to live on.
"An extra 11p an hour is simply not enough. Millions of workers need a living wage of £8 an hour to cope with rising prices and keep them out of poverty.
"And what message are we sending to our young people when the rates for those under 21 are frozen? They deserve a fair day's pay for a fair day's work, and should not be left vulnerable to exploitation.
"Of course it is taxpayers who lose out too, as they will have to pick up the in-work benefits bill because of Scrooge employers."
John Longworth, director-general of the British Chambers of Commerce, which represents businesses, says: "We are disappointed the Government has chosen to raise the adult national minimum wage rate by 1.8%, far above our recommendation.
"While the pressures of inflation are hurting many people, especially the lowest paid, this decision adds significantly to the cost of doing business, and feeds wage inflation at higher levels."