Swedish firm Ikea will become the first national retailer in the UK to pay staff above the government's new National Living Wage from next year.
Ikea, known for its flat-pack, self-assembly items, said it would pay all its 9,000 UK workers at least £7.85 an hour from April 2016.
The rate for employees in London will be £9.15 an hour.
Chancellor George Osborne announced a a new compulsory living wage of £7.20 an hour in the Budget earlier this month.
He said that employers must pay at least that much to workers aged 25 and over from April, with the rate rising to more than £9 an hour by 2020.
The existing minimum wage for those over 21 is £6.50 an hour.
Ikea said it would instead pay all its UK workers - including those under 25 - the rate set annually by the Living Wage Foundation, making it the first national retailer to do so.
About half of its 9,000 UK employees will benefit from the decision.
Rhys Moore, director of the Living Wage Foundation, said: "This is a huge step for the British retail sector and we hope that many other businesses will follow the leadership IKEA is showing on the issue of basic pay."
Following the Budget, the foundation welcomed the chancellor's decision, but described it as "effectively a higher national minimum wage and not a living wage".
The move is expected to boost the wages of six million people in both the public and private sectors.
Business groups questioned Mr Osborne's decision, with Katja Hall, deputy director-general of the CBI, describing it as "quite a gamble", while the Association of Convenience Stores called it a "reckless measure".
However, Simon Walker, director-general of the Institute of Directors, said the body believed that it was time for employers to increase wages.
Ikea is the UK's biggest furniture retailer with 18 stores and plans to open more in Sheffield, Reading, Exeter and Greenwich in southeast London.
Although its UK sales rose 12% to £1.46bn in the 12 months to August 2014, pre-tax profits fell £5m to £41.8m.
Last year Ikea said it would raise the minimum wage for its US retail employees by an average of $1.59 an hour to $10.76 (£6.89) in 2015.