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?
Unveiled in the Summer Budget of 2015 by then-Chancellor George Osborne, the National Living Wage (NLW) became law on 1st April 2016, and was originally only available to those aged 25 or over.
Anyone aged 23 and over, and not in the first year of an apprenticeship, must be paid at least £8.91 per hour.
Confusingly, the National Living Wage isn’t truly linked to the cost of living (that’s where the Living Wage comes in).
National Living Wage (NLW) key facts
For employees aged 23 and older
Pay at least £8.91 per hour
Are the National Living Wage and Living Wage the same thing?
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 (although many do simply on principle).
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.
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 NLW. The mandatory National Living Wage is set at £8.91 per hour, and any future rises will be on the recommendation of the Low Pay Commission.
How does minimum pay affect businesses?
Whilst the theory behind the National Living Wage is broadly welcomed, and is certainly critical for the workforce, it does have certain financial implications for businesses. Needing to pay your staff higher wages is likely to mean more of a squeeze on your profit margins. This in turn can cause price rises for customers, or even having to let staff go if the rate increases to the extent where you can no longer afford your workforce.
These rises can also mean businesses find themselves needing to pay ‘spill over’ costs just to maintain a difference between entry-level incomes and higher wages. Then there are the additional employer costs of paying more, such as higher pension contributions.
So, what is the National Minimum Wage and what does it mean for businesses?
The National Minimum Wage Act was first established in 1998, and came into effect on 1st April 1999. Way back then, it was set at a rate of £3.60 per hour for those over 18, with a lesser rate of £3 for younger workers.
There have been many iterations of the policy since then, and rates have gone up many times since. However, the concept behind the National Minimum Wage has remained 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). The rates are updated on 1st April each year.
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. Our article about director’s salaries explains how this works in more detail!
But how does low pay actually come about?
Low pay can result from a number of labour market failures, including:
Lack of bargaining power for people who work in labour markets that are flat or not very competitive. For example, a market where there are only a couple of employers. Where this is the case, an employer might have a ‘take it or leave it’ attitude.
Where access to the labour market is difficult. This could be due to discrimination, for example.
Flooded labour markets. Higher wages can lead to reduced demand as prices rise, forcing employees to accept the wage or face unemployment.
A lot of inward migration where workers are coming from low-pay countries. If this is the case, workers are far more likely to accept extremely low pay and short-term contracts. Wages are then driven down for indigenous employees.
The introduction of the NMW means there’s less chance of workers being exploited by a small number of large employers. It should, in theory, also mean a reduction in the number of people living below the poverty line.
Sadly, a higher minimum wage can cause some businesses to inflate their prices in order to maintain a particular profit margin. Companies might also look to make up the difference by employing fewer people, causing a rise in unemployment. A NMW can also mean:
The price of UK goods and services becomes higher and therefore less competitive against other countries where wages are much lower, such as India and China.
Foreign investors may look to swerve higher wage economies in favour of lower wage ones, leading to less investment into the UK.
Both employers and employees may be tempted by the ‘unofficial’ labour market.
What happens if a business doesn’t pay the NMW, NLW, or Living Wage?
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 NMW 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 has its own compliance teams that 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.
It’s certainly a minefield! Although we’ve done our best to explain the terminology here, you may still have questions around staff pay and how the law affects your business. And of course, there are likely to be tax implications too. If you would like to discuss anything we’ve raised in this article, please do feel free to get in touch with our team.
An experienced Payroll professional, I hold a CIPP Diploma in Payroll Management and have been working in the sector since 2003. In my spare time I like to be with my friends and family, or doing a spot of pilates.