A rise in the national minimum wage for younger employees in October could lead to many retailers cutting corners and paying cash in hand.

The warning came as the Government announced a 3.7% increase in the hourly rate for 21-24 year-olds to £6.95, and a rise of 5% for 18-20 year-olds to £5.55.

The rate for 16-18 year-olds will be £4 an hour. It follows the introduction of the national living wage today.

Harry Goraya of Nisa Local in Northfleet, Kent, said: “The only way retailers can recoup that expense is to pass it on to customers, which is really difficult in the competitive climate we’re in.

“I’m hearing more and more retailers doing things they shouldn’t be doing.”

Ram Odedra of Mace Whissendine in Rutland, East Midlands, said: “I think it could drive it underground, with people paying cash in hand, which means the Government won’t get the tax or National Insurance.”