Volkswagen (VW) has announced a 4.8% pay rise for staff at a time when it is facing incalculable costs relating to the company’s emissions scandal.

The carmaker, which has recorded falling sales across Europe in the wake of its admission that it had fitted software to cheat testing regimes, said workers would get 2.8% more on 1 September followed by a further 2% in August 2017.

It confirmed the figures following union talks in Germany and said 120,000 staff would benefit.

The pay deals fly in the face of negative inflation in Germany and the wider eurozone, which last recorded a -0.2% annual rate of price growth.

German annual wage growth is currently measured at 2.5%.

VW, as a group, has already set aside £12.7bn to cover costs associated with the diesel emissions probe – which covers 11 million vehicles worldwide.

A month ago it recorded an annual loss of £4.3bn for 2015 – its first slide into the red since 1993.

It is facing scores of lawsuits in addition to huge bills from recall programmes and likely regulatory action.

One settlement on the table in the US could lead to VW buying-back almost 500,000 cars at a cost of £7bn.

It still faces a criminal inquiry in the country while Norway’s wealth fund was the latest body to confirm that it was joining a class-action suit in Germany, citing few signs of reform at the company.

VW has been resisting calls within Europe – the company’s biggest market – to compensate drivers in addition to planned recalls of 8.5 million vehicles including 1.2 million in the UK.

Of the top-10 selling brands in the EU, it was the only one to record falling sales in Europe over the first three months of 2016.

The company’s chief executive Matthias Mueller has previously warned of “massive cutbacks” to help account for the costs of closing down the emissions issue – placing him on a collision course with unions.

VW confirmed earlier this year that Mr Mueller’s predecessor, Martin Winterkorn who quit over the emissions issue, was handed £13m in total awards for 2015.

Senior bosses were having bonuses trimmed, it said.

The company is yet to put an estimated cost on the scandal and the publication of an investigation it commissioned from a US law firm have been delayed.