Last reviewed 5 July 2016
The National Minimum Wage (NMW) first came into force on 1 April 1999. Since then the NMW has gradually risen, with the latest development being the introduction of a National Living Wage (NLW) rate. Paul Tew, Small Business Consultant and Freelance Advisor examines the implications of the new NLW for all employers.
The different pay rates
The Government has the power to apply different rates in different circumstances, but may not set rates that differ according to:
sectors of employment
size of employer’s business
nature of the worker’s occupation.
The National Minimum Wage (Amendment) Regulations 2016 (SI 2016 No. 68) provide for the NLW to be calculated by adding together a new Living Wage premium and the main NMW rate of £6.70 per hour. The Living Wage premium is set at 50p per hour, so the NLW is initially fixed at £7.20 per hour. The current full pay rates for the NMW/NLW are:
25 or Over
Rate per hour
*This rate is for apprentices aged 16–18 and those aged 19 or over in their first year of apprenticeship. All other apprentices are entitled to the NMW for their age. So those apprentices aged 25 and over, in the second year of an apprenticeship, are entitled to be paid the NLW.
Timing of the change
The NLW takes effect for the first pay reference period starting on or after 1 April 2016. The pay reference period is usually the worker’s actual pay period, up to a maximum of one calendar month. For minimum wage purposes, the pay allocated to a pay reference period is any pay:
received during that period
earned in that period but not received until the next pay reference period.
A salaried worker, paid calendar monthly on the last working day of the month, must be paid the NLW for April’s salary on 29 April. If the monthly pay reference period starts on the first of each month, a worker whose 25th birthday falls on the 25 April is entitled to receive the NLW rate from 1 May, the first pay reference period following his or her 25th birthday.
To pay the NLW, it is necessary to have an accurate record of a worker’s age. Underpaying an employee because his or her age is not known or has been incorrectly recorded will never be a legitimate employer defence. It is the employer’s responsibility to keep records proving that it is paying the correct pay rate. A copy of the payroll would be a “sufficient” record. All records have to be kept for three years after the last pay reference period.
The NMW rates are usually updated every October. From 1 April 2017, the NMW and NLW cycles will be aligned so that both rates are amended on 1 April each year.
How penalties are applied
Employers who discover they have paid a worker below the relevant hourly pay rate must pay any arrears immediately. If HMRC discovers that an employer has not been paying the correct rates, there will be a penalty imposed.
The penalty payable by an employer who has underpaid the NMW has been increased following the introduction of the NLW. Where an HMRC officer is of the opinion that an employer has underpaid a worker, or has not fully repaid any arrears which the worker is entitled to, he or she may serve a notice of underpayment requiring the employer to pay arrears to the worker or workers named in the notice. The employer is normally required to pay a financial penalty to the Secretary of State within 28 days of the notice being served.
The financial penalty is calculated as a percentage of the total arrears of NMW for all workers specified in the notice of underpayment. The percentage-based penalty has been increased from 100% to 200% (this increased penalty percentage only applies in respect of pay reference periods that commenced on or after 1 April 2016). A penalty calculation set at 200% of the arrears owed and reduced by half for prompt payment (paid within 14 days) ensures a penalty payable of at least the equivalent to the arrears owed. The maximum penalty remains set at £20,000 for each worker named on the penalty notice.
The Department for Business, Innovation and Skills (BIS) can also “name and shame” organisations who have not complied with their duties by issuing a Press Release to this effect. BIS does not maintain a public register of employers who have failed to pay the minimum wage or who have been named.
It is illegal to pay a worker less than the NMW or the NLW, even if this is a means of avoiding making redundancies. If the introduction of the NLW causes an employer financial difficulties, it may be possible to reduce the wage bill by reducing the worker’s hours. However, if there is no contractual right to vary an employee’s working hours, the employer must gain the written agreement of the relevant employees before the change is implemented.
Employers must also be wary when recruiting new workers not to actively target people under the age of 25 in order to reduce payroll costs, as this could lead to claims of age discrimination.
The NLW is not the Living Wage
The NLW is completely separate to the Living Wage, which is calculated according to the basic cost of living in the UK. The NLW places a statutory duty on employers to pay the relevant rate, whereas the Living Wage is a rate of pay that employers can voluntarily choose to pay.
The Living Wage is set independently and updated annually by the Living Wage Foundation and has two separate rates. From 2 November 2015, the UK Living Wage is £8.25 per hour and the Living Wage for London, which covers all boroughs in Greater London, is £9.40 per hour. There is no penalty imposed on employers for not paying the Living Wage.
The Finance (No. 2) Act 2015 sets out in tax law that where the personal allowance is less than £12,500, the Government must consider the financial effect on a person paid the relevant NMW. Once it reaches £12,500, those working 30 hours a week on the adult NMW rate will not pay income tax. The NMW rate will have to be set at £8 per hour to reach the revised personal allowance level (£8 x 30) x 52 = £12,480. The Government is committed to raise the personal allowance to £12,500 by tax year 2019/20.
The Low Pay Commission (LPC), which reports on matters concerning the NMW to the Government, has recommended that the following increases take effect from 1 October 2016.
Rate per hour
The Government accepts all of these rate recommendations. The Government has also asked the LPC to set out how the new NLW will reach 60% of median earnings by 2020. Based on earnings forecasts, this means that the NLW will be over £9 by 1 April 2020.