Announced during the Chancellor of the exchequer Rachel Reeves Autumn ’24 Budget delivered last month; significant increases are on the horizon for national living and minimum wage rates. Another step towards the government’s intention of having a single wage rate for all workers of at least school leaving age.

Effective from the next tax year starting April 2025, national living wage increases by 6.7% to £12.21 for workers aged 21 and over. The highest wage increase has been awarded to under18s and apprentices who will receive £7.55, an 18% increase from the current £6.40.

‍These rates are applicable to the first pay reference period starting on or after the date of change. In this case, the date of effect is 1April 2025. For example, if the pay reference period starts on the 20th March to 1 April, the old rate is applicable for that pay reference period and the new rate from 20April (new pay reference period).

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Calculating NMW

 When calculating wage rates, there are a few factors to consider which can impact actual rates paid. The following may affect the calculation of National Minimum Wage if they reduce gross pay:

- Pay deductions
- Training
- Type of work
- Unpaid working time
- Salary Sacrifice
- Accommodation
- Uniform
- Transport
- Meals
- Expenses
- Personal Protective Equipment (PPE)
- Administrative Charges/Fees

In addition to understanding what factors may reduce wage rates, it also important to note the following are not considered when calculating minimum wage:
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- Tips, gratuities, service charges and cover charges
- Overtime (Shift premium)
- Allowances
- Expense reimbursement
- Benefits in kind
- Loans
- Advances of wages
- Pension payments
- Lump sums on retirement
- Redundancy payments
- Shares and share options

The following example scenarios take into consideration the above factors, applying the current minimum wage rates:

Example 1 ‍

A 23-year-old waiter is paid £600 in September for 40 hours contracted per month and Tips amounting to £142.40.
To calculate minimum wage pay:

1. Work out how much of the gross pay is considered for minimum wage

£600 - £142.40 = £457.60

2. Divide the amount by hours worked

£457.60 / 40 = £11.44

This complies with minimum wage as the worker is entitled to £11.44 an hour.

 Example 2‍

A 20-year-old apprentice now in their second year of apprenticeship is paid £896 for the month of September. They worked 140 hours this pay reference period.

To calculate minimum wage pay:

1. Work out the hourly rate

 £896 / 140 = £6.40

This does not comply with minimum wage as the apprentice rate is no longer valid for this worker. They should receive the applicable rate as they have completed 1 year and aged 19+.
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To work out the underpayment, you need to use the correct rate (£8.60) to calculate the amount owed.

1. £8.60 x 140 = £1,204

2. £1,204 - £896 = £308

The worker was underpaid by £308.

Example 3

An 18-year-old leaves education and gets their first full-time job contracted to 37 hours per week with a salary of £19,240.

To calculate minimum wage pay:

1. Work out annual hours

37 x 52 (working weeks per year) = 1,924

2. Work out hourly rate

£19,240 / 1,924 = £10

This complies with minimum wage as the worker is entitled to £8.60. Their employer will need to track pay in the next tax year as some deductions will impact the wage rate.

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HMRC enforcement

Employers bear a significant role in ensuring workers are paid at least the national minimum wage. Payment of the rate is a legally enforceable right to eligible individuals under the NationalMinimum Wage Act 1998 (1998 Act). To raise awareness and tackle non-compliance with NMW, HMRC have taken a regional approach in which regions (rather than business type) are selected based on data suggesting workers likelihood of underpayment.

So, how does the enforcement process work?

1. HMRC initially sends a ‘nudge’ letter, prompting employers to review their compliance with NMW. This is not a request for action by a certain date or a notice of investigation. The nudge letter allows employers identify and rectify potential issues identified without being sanctioned.

2. The next step is an offer from HMRC to perform a health check or audit of an employer's NMW compliance. This request should be approved as failure to do so will likely result in a formal enquiry.

3. If selected for further investigation by HMRC, the compliance team will undertake a full review and inspection of an employer going back up to 6 years.

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Once a thorough investigation has been completed, if an employer has been found to be in breach, the reviewing officer may issue a notice of underpayment (NoU) to which HMRC (on behalf ofBEIS) have a range of enforcement options.

As activity increases, it is imperative for your businesses reputation to avoid becoming an employer named on the shame list for failure to pay minimum wage.Last released earlier this year, over 500 companies were listed for breaches of the act which affected over 172,000 workers owed nearly£16m in unpaid wages.

Potentially the most detrimental to any business are financial penalties. The revised penalty which came into effect in April 2016 requires employers to pay arrears of the minimum wage to affected workers (at the current rate) and pay a penalty up to 200% of the value of wage arrears (this is reduced by 50% if employers comply with the notice terms within 14 days). However, employers who have been found to deliberately fail payment of national minimum wage potentially face an unlimited fine. 

Conclusion

Folio’s outsourced payroll service offers more than just standard processing. Our team of knowledgeable and experienced professionals are available to support your business with compliance and operational excellence. For more information on fully managed payroll services or guidance on how your business can take proactive steps to avoid breaching employer obligations, get in touch.

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