In April 2024, the previous Conservative government increased the national minimum wage (NMW) for people over the age of 23 from £10.42 per hour to £11.44, a rise of 9.8%. The NMW rate for 21 and 22-year-olds also moved to £11.44 per hour from its previous rate of £10.18, representing a 12.4% jump, and the rate for 18 to 20-year-olds increased 14.8% from £7.49 to £8.60.
The new Labour government, which came to power in July, has pledged to increase these figures even further. The Living Wage Foundation considers the real cost of living to be £12 per hour and it is expected that, from possibly as early as April 2025, Labour will introduce a flat minimum rate of £12 per hour for everyone aged 18 and over. If implemented, this will represent a nearly 40% increase for those between the ages of 18 and 20, and severely impact the hospitality and retail sectors, where a large portion of the workforce is aged under 21.
Where these NMW increases bring a significantly greater number of workers closer to minimum levels, employers need to be mindful that there are various elements that do not count towards NMW pay, including shift premiums, overtime pay, reimbursement of expenses, and benefits in kind. However, there is one particular aspect that is the most common cause of breaches. This is the effect of deductions from wages which reduce pay for NMW purposes and includes salary sacrifice arrangements, such as for pension contributions.
Salary sacrifice is an arrangement whereby an employee agrees to a reduction in their salary that is equal to, for example, their pension contribution. In return, the employer pays in each employee’s total pension contributions. The employee’s pay for NMW purposes is calculated after the deduction has been made and can result in unintentional underpayments. Therefore, while a simple look at workers’ basic hourly rates of pay may seem to indicate that they are being paid the requisite NMW rate, they may have in fact fallen below the threshold.
As a minimum, employers are required to keep a record of employees’ pay and time. To evidence that the NMW has been complied with, we also recommend maintaining detailed records of the various elements that make up the total pay, any deductions for accommodation or absences, pay received during those periods, and details of time spent on business travel. Since April 2021, records must be kept for a minimum of six years from the end of the pay reference period following the period to which they relate.
HM Revenue and Customs (HMRC) has recently set up more enforcement teams to proactively target and profile businesses of all sizes. This has included a focus on traditionally higher-paid head office staff who, due to the combination of the significant increase in NMW rates, salary sacrifice practices and long working hours, are now falling within the scope of potential NMW breaches.
If, following an audit, the employer is unable to demonstrate compliance, HMRC will issue enforcement action by way of a notice of underpayment of the total arrears, currently up to a maximum of £20,000 per worker, and an additional penalty equivalent to 200% of the total arrears. The financial penalty will be reduced by 50% if the employer fully complies with all the terms of the notice of underpayment within 14 days of its service.
Labour has committed to enforce tougher penalties for non-compliance and more resources for the enforcement agencies, including establishing a single body with extensive powers of inspection and enforcement. The maximum fine for underpaying workers will also be increased from £20,000 to £50,000 per worker.
There is very little scope to avoid a penalty payment once HMRC has begun investigation, even where the underpayment was unintentional or made in error. However, corrections made before HMRC’s involvement will not lead to penalties. There is, therefore, real benefit in employers getting on the front foot and reviewing existing payment practices and contractual documentation now, to ensure compliance.
Richard Branson is a senior associate at Fieldfisher
