National Minimum Wage: don’t get caught out

With increases in National Minimum Wage / National Living Wage (NMW/NLW) coming into effect from the 1 April 2023, lots of companies will now be gearing up for their first payroll under the new rates.

Minimum wage impacts more jobs now than ever before; the Government estimate that 2m jobs are now paid at or around the minimum wage level (it was under 1m 10 years ago). In total that is 7% of the working population and a large chunk of these jobs are in hospitality and retail (our specialty).

Although NMW has been around since 1999, companies are still getting minimum wage compliance wrong! HMRC have the power to investigate instances of non-compliance with companies liable to fines, public naming and making good all short payments.

NMW can actually be more complicated than it sounds, so we’ve summarised the most common pitfalls based on the latest HMRC published investigations.

First things first – what is NMW?

NMW / NLW is calculated as;

Gross pay divided by the hours actual worked

So we’re clear, NMW is something that impacts hourly paid staff and salaried staff. Just because you are paying someone a salary of £24k does not mean that you are meeting NMW/NLW requirements – if they are working on average over 48 hours a week, you’ll be paying them below NLW (£24,000 / 52 weeks / 48 hours per week = £9.62 per hour)

Minimum wage is assessed each payment period, so if you are paying wages monthly, it’s each month, if you’re paying weekly, it is each week. In each payment period the gross wage divided by the number of hours worked needs to meet the NMW.

Deductions

If you make deductions from an employees Gross pay, you are going to impact the above calculation which can push you into non-compliance. 37% of all non-compliance arose due to companies getting salary sacrifices and gross pay deductions wrong. If you are operating a salary sacrifice scheme or if you are making deductions for uniforms or meals you need to remember these deductions come off gross pay.

If you are paying a worker at the NMW rate and you make any deduction at the gross pay level, you’re going to be in breach.

If you want to make deductions from salaries make sure you speak to your payroll provider or HR team to keep you compliant.

Unpaid time

29% of non-compliance has arisen from not paying workers for all the time they have worked. There are lots of reasons for this, but common oversights are rounding down time when it comes to clocking in / out, additional hours worked outside shift and paid a shift rate, unpaid mandatory training and salaried staff working too many hours for their salary to cover minimum wage (as in the example above).

Most of the above can be corrected by looking at your clocking system. And making sure you pay people for training! Again, speak to your accountant, HR team or payroll provider if you are worried about any of these points.

Incorrect rates

Around 26% of non-compliance has arisen by paying the incorrect rates. This most often happens around apprenticeships but also regularly happens when staff have a birthday which moves them between minimum pay bands;

NMW rate

National Living Wage (23+)

£10.42

21-22 Year Old Rate

£10.18

18-20 Year Old Rate

£7.49

16-17 Year Old Rate

£5.28

Apprentice Rate

£5.28

Your payroll provider should be able to help you with identifying these changes, however not all payroll software is set up to correctly pick up these changes so make sure you are checking!

Accommodation offset

If staff rent their accommodation from you (even if you own it personally and not through your company), part of the rent they pay will reduce their gross pay when calculating national minimum wage. If you do have this set up it’s worth speaking to your payroll team to make sure you have this properly checked.

Tronc & tips

This is not a point HMRC brought up in their latest report but it is one to remember; tronc or tips do not count toward gross pay in your NMW calculation. You can make deductions for uniforms / meals etc out of tronc payments which will not impact your NMW calculation at the moment, however deductions from tips will be banned when new legislation comes into force shortly, so if you are doing this at present you will need to have a rethink.

And finally – listen to your employees!

If you are underpaying your employees (and they notice it), they will tell you. Sort it out! Pay them what you have missed and correct it going forward. If you don’t, expect a call from HMRC.