The National Living Wage could spell disaster for those who receive state-funded care at home, the industry has warned.

The UK Homecare Association said in an open letter to George Osborne that his flagship measure presented a "serious risk of catastrophic failure" if extra costs in the sector were not fully funded by the UK Government.

The organisation estimates that raising the minimum wage for over-25s to £7.20 in April and £9 an hour by 2020, announced in the Budget earlier this month, would see costs increase drastically as employers were also hit by additional National Insurance contributions.

It is said that while it welcomed the commitment to low-paid workers, it estimates that the policy will mean an extra £753 million would have to be provided to councils and the NHS, who often pay external organisations to provide services, in the first year alone. If added costs to external providers are not covered, it was warned that some will pull out of the market leading to "considerable distress for people who use homecare services and their families".

The letter, signed by more than two-dozen organisations that provide home care, states: "Unless the additional costs are fully-funded, there is a serious risk of catastrophic failure to support people who receive state-funded care at home.

"Without urgent action from Government and local councils to address the deficit in funding, continued supply of state-funded homecare will become unviable at a time when Government looks to social care services to support an over-stretched NHS, particularly supporting people to leave hospital promptly."

The body, which represents 2,000 members across the UK in what is traditionally a low-paid profession, has called for the impact of wage increases to be considered in the forthcoming spending review and for new tax breaks for care providers.

The Scottish Government has said it wants to see more people cared for at home as a way of preventing hospital admissions and reducing the burden on more expensive care home places while also improving quality of life.

A Scottish Labour spokesman said: "We support giving low paid workers a wage rise, but councils can't be left in the lurch. Local authorities in Scotland have been underfunded for years by the SNP Government in Edinburgh. Ministers must look very closely at this and find a workable solution."

Despite the minimum wage being set at Westminster, Holyrood has power over home care services. It was recently warned that the Scottish Government's policy of providing free health and social care has soared to almost half a billion pounds a year. Almost three quarters of cash spent on the policy is for services provided to pensioners in their homes, according to Fiscal Affairs Scotland.

The UK Homecare Association estimates that older people's care costs authorities an average of £13.68 an hour in Scotland, a total it estimates will rise to £16.70 as a result of the minimum wage hike.

A UK Government spokesman said: "The National Living Wage will benefit hundreds of thousands of care workers who will see their pay increase.

"The overall costs of providing social care will be considered as part of the spending review later this year, and we are working with the care sector to understand how the changes will affect them."