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The National Living Wage (NLW), the National Minimum Wage (NMW), and the Living Wage all sound confusingly similar, so understanding how they affect your business isn’t always easy. We’ve put together this article to help you get to grips with it all, and avoid any penalties as a result of not paying staff the right amount.

If you’re a brand-new employer (or about to be!), check out our New Employer’s Guide to help start you off.
 

What is the National Living Wage?

Are the National Living Wage and Living Wage the same thing?

What is the National Minimum Wage?

Does minimum wage apply to company directors?

How does minimum pay affect businesses?

What happens if a business doesn’t pay the minimum wage?

The National Living Wage (NLW) became law on 1st April 2016, and sets out the minimum hourly rate which some employees must receive. Originally available to those aged 25 or over, it’s currently payable to any employee aged 23 or older and not in the first year of an apprenticeship. The age threshold will reduce to include anyone aged 21 or older from 1st April 2024.

Confusingly, the National Living Wage isn’t linked to the cost of living (that’s where the Living Wage comes in).

National Living Wage (NLW) key facts

 

Not to be confused with the National Living Wage, the Living Wage is defined by the Living Wage Foundation. It makes clear the hourly rate a worker needs to earn as a minimum to cover the basic cost of living, and is calculated independently.

Unlike the National Minimum Wage (NMW) and National Living Wage (NLW), there’s no statutory obligation for employers to pay the Living Wage.

Employers are able to apply for accreditation from the Living Wage Foundation if all their contracted and directly employed staff are paid the voluntary living wage.

Living Wage key facts

Regional variations of the living wage

The Living Wage rate varies depending on where you are in the UK. For example, the living wage for London, announced by the Mayor of London, is determined by the Greater London Authority’s Living Wage Unit.

The living wage rate for all areas of the UK outside of London is defined by the Centre for Research in Social Policy at Loughborough University. It’s based on a calculation known as the “Minimum Income Standard” for the UK. A review of both the London and National Living Wage rates is carried out in November each year.

The thing to bear in mind here is that the Living Wage, as used by the Living Wage Foundation, is not the same as the compulsory National Living Wage (NLW). The mandatory National Living Wage is set at £10.42 per hour for 2023/24, and increases to £11.44 in April 2024. Any future rises will be on the recommendation of the Low Pay Commission.
 

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The National Minimum Wage Act came into effect on 1st April 1999. Despite many iterations of the policy since then, the concept behind the National Minimum Wage remains the same – to help alleviate the problem of poverty pay.

If your business employs staff, then you must pay them at least the National Minimum Wage by law. Unlike with the Living Wage, there’s no choice.

What are the current rates for National Minimum Wage?

These rates are for the National Minimum Wage (for people of school leaving age or over) in 2023/24 and in 2024/25. The rates are updated on 1st April each year.
 

Employee Age 2023/24 2024/25
Apprentices and Under 18s £5.28 £6.40
18 to 20 years old £7.49 £8.60
21 to 22 years old £10.18 National Living Wage

No, directors don’t fall under the rules for National Minimum Wage or National Living Wage unless they have an employment contract defining them as a ‘worker’. It means that company directors can pay themselves a tax-efficient combination of a director’s salary and dividends without breaking the rules around minimum pay.

Increasing the rate of minimum wage can have financial implications for employers beyond paying staff. Higher pay might result in more of a squeeze on your profit margins, which can then be a trigger for other changes. For example, you might decide to increase your prices, but this can then affect the way you engage with customers, or even bring your turnover up to the threshold for VAT registration.

Minimum wage rises can also see businesses forced to pay ‘spill over’ costs just to differentiate between entry-level and more experienced roles.

It’s also important to think about what this might mean for additional employer costs such as pension contributions. These are calculated as a percentage of an employee’s salary, so higher pay also means more contributions.

Use our salary calculator to work out the cost of hiring someone.

It’s against the law not to pay employees at least the National Minimum Wage, or the National Living Wage if they fall into that age range. It’s also illegal to falsify payment records.

The Living Wage is optional, but failure to pay at least the National Minimum Wage will very likely land your business in hot water with HMRC. Paying below the minimum legal threshold can attract a fine of £20,000 per worker. Employers may also face a ban from being a company director for up to 15 years.

HMRC compliance teams carry out checks and will respond to complaints from workers who are not receiving the minimum pay they’re legally entitled to. They will also check an employer’s payment history and other records, and ensure companies understand their legal obligations in full.

Learn more about our online accounting services, including payroll. Call 020 3355 4047 and get an instant online quote.

About The Author

Suzanne Goodier-Dodson

I'm a Payroll Manager with a degree in Mathematics, responsible for overseeing every aspect of payroll for our clients. In my spare time, I love to travel and going to gigs. Read my Staff Spotlight.

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