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The increase means $1400 in back-pay and an additional $53 a week before tax for backbench MPs.
The Remuneration Authority - the independent panel of three that sets pay for MPs, other elected officials and judges - says the 1.9 per cent increase is less than the rise in general salaries and wages.
But the Public Service Association says the increase is more than that received by other public servants in recent settlements.
The increase boosts Mr Key's annual base salary $7790 to $419,300, equivalent to an additional $149.80 a week before tax. As it is deemed to have come into effect on July 1 this year, that means backpay of $3895, or $2594 after tax.
Backbench MPs' base pay rises $2800, or $53.80 a week before tax, to $144,600. Their backpay will be $1400, or $932 after tax.
Remuneration Authority chairman John Errington said MPs' pay had not kept pace with increases in the cost of living or with general wage movements.
Since 2009, general salaries and wages had risen 5.6 per cent while parliamentary salaries, excluding the $2000 and $5000 increases to make up for the loss of travel perks, had risen only 2.9 per cent, he said.
Yesterday's increase "still leaves members of Parliament receiving lower remuneration increases than the general population".
But PSA national secretary Brenda Pilott said the increase was higher than the 1 to 1.5 per cent settlements in most public sector collective agreements from the past year.
She said many PSA members were angry about any pay increases for ministers who presided over departments that were struggling and cutting jobs to save money.
The backdating of MPs' pay was particularly galling as it had been off the table in public sector pay negotiations for some time.
"To see that the ministers and MPs have had a decent-sized pay rise backdated for nearly six months is just such a double standard," Ms Pilott said.
The Remuneration Authority also announced a 2.5 per cent increase in pay for judges, effective from October. That takes a High Court judge's base pay from $385,500 to $395,137 and a District Court judge's salary from $293,000 to $300,500.
Mr Errington said the higher increase reflected changes in the legal profession.
$419,300 Prime Minister ($7790 increase)
$297,400 Deputy PM ($5600)
$262,700 Crown ministers, the Speaker, Leader of the Opposition ($4900)
$158,700 Party leader base salary ($3000)
$144,600 Backbench MPs ($2800)
$52,676 average NZ wage