The national minimum wage (NMW) is to increase by 7 per cent.
From October, the NMW for adults will increase by 40p from £4.10 to £4.50 an hour, with the NMW for under-18s to increase by 30p to £3.80.
The Government has also provisionally accept a recommendation by the Low Pay Commission to increase the NMW by a further 35p to £4.85 in October 2004.
The commission believes that up to 2.5m workers will benefit from the increase.
Patricia Hewitt, trade and industry secretary, said: "These increases are well above the rise in average earnings and will benefit more people than ever across the UK.
"We are committed to eradicating poverty pay for all, without jeopardising job prospects. We are confident this increase will not have a detrimental effect on either employment or the wider economy.
"The Government is pleased to accept the recommended rate increases for 2003 and to also provisionally accept the increases for 2004, subject to consideration of further advice from the commission early next year."