Employer advice ahead of major change for payroll

Minimum wage: know the rules not just the rates

Forthcoming changes highlight the need for employers to deal confidently with the underlying rules. Notably, from 01 April 2024:

• the National Living Wage (NLW) becomes £11.44 per hour
• those aged 21+ qualify for NLW rather than the lower, National Minimum Wage (NMW).

We use the term ‘minimum wage’ to refer to both the NLW up and NMW.

Minimum wage is complex, and a slip up in the underlying calculations can put employers at risk. The danger is not just confined to sectors like retail, hospitality, and cleaning and maintenance, where historically many workers have been paid at or below minimum wage. Because there is so little margin for error, employer risk also arises where payment to workers sits at, or just above, minimum wage. Something like payment into a salary sacrifice scheme can easily the tip the scales, creating an underpayment for a previously compliant employer.

Steps to compliance:

• Categorise workers according to the type of work they do. There are four types of work for minimum wage: salaried hours work; time work; output work; and unmeasured work. For each one, rules on what counts as working time — and therefore the hours to be paid at minimum wage — apply differently.
• Identify the particular period for which the worker is paid (the pay reference period).
• Work out the average hourly rate of pay for the pay reference period:
  • Calculate the pay for period, with regard to minimum wage rules on what counts as pay, minus any deductions.
  • Calculate hours worked in the period, with regard to minimum wage rules on what count as hours of work.
  • Divide the pay for the period by the number of hours worked in the period, to give the average hourly rate for the period.
• Check which minimum wage rate band the worker falls into.
• Check average hourly rate of pay for period is not less than the relevant minimum wage rate. If less, pay should be topped up so that at least minimum wage is paid.

HMRC regularly names and shames employers who make mistakes resulting in underpayment. The most common problems occur when paying apprentices; making deductions from pay which take wages below minimum wage; and not paying for working time correctly.

Get in Touch

Compliance with the rules is far from straightforward, and we have only been able to provide an overview here. Please contact our dedicated payroll services experts for help or further information about employer payroll and any other payroll matters where our payroll experts can help.