Sainsbury's is to increase wages by 4% for 137,000 employees from this weekend, the supermarket said.
The new rate of £7.36 per hour will apply from August 30 to 97% of those working in stores, such as check-out workers and shelf-stackers.
Sainsbury's said the "industry leading" 4% rise was the highest increase it had awarded to store employees in more than a decade.
It comes ahead of the introduction of the National Living Wage for workers aged over 25, starting at £7.20, from April next year - with the retail sector expected to be among those most affected by the change.
Sainsbury's said its pay increase would apply across the board, meaning 40,000 employees below the living wage age threshold would be among those to benefit.
The £7.36 rate still lags behind that of Tesco at £7.39 but Sainsbury's suggested it compared favourably with its larger rival because it pays for staff members to have a 30-minute break during an eight-hour shift.
Sainsbury's said this meant one of its store staff would earn £287.04 for a 39-hour week, £17.30 more than a Tesco employee for a comparable working week.
The supermarket also pointed to benefits such as a pension, life insurance, a discount card and an annual bonus that this year saw 133,000 workers share a pot of £50 million.
Tesco said it paid one of the highest rates in retail and pointed out that it offered benefits including a discount, shares scheme and pension.
Sainsbury's chief executive Mike Coupe said: "We're delighted to announce a 4% pay increase for the colleagues who work in our stores across the country.
"We know what a difference they make to our customers each and every day and we're totally committed to rewarding them well for the great service they provide."
Usdaw national officer Joanne McGuinness said a significant increase in retail pay was "long overdue".
"We meet with the company every year and make a strong case for decent rewards for staff, particularly around pay, and the new rate of £7.36 is a step in that direction."
Sainsbury's employs 161,000 people. The latest increase does not apply to store managers, whose pay settlements are dealt with separately, or under-18s being paid an introductory training rate for their first six months.
It also does not apply to those employed in support centres and depots.
The announcement comes as the major supermarkets are engaged in a fierce price war as they vie for a customer base being gnawed away at by discounters Aldi and Lidl.
In June, Sainsbury's posted its sixth successive quarter of sliding like-for-like sales, which were down 2.1% in the 12 weeks to June 6.
Data this week from Kantar Worldpanel showed it was the only one of the big four grocers to grow total sales in the 12 weeks to August 16, with a 0.1% rise. But it still saw its place as Britain's second biggest supermarket regained by Asda.
Chancellor George Osborne said: "At Budget I announced a new settlement for the British people, one that will create a higher wage, lower tax and lower welfare economy backed by a new National Living Wage.
"Britain deserves a pay rise and today's announcement from Sainsbury's that from September they will pay their hard-working staff at least the National Living Wage, is fantastic news and a real vote of confidence in the UK economy."