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From 1 April 2024, the National Minimum Wage (NMW) and National Living Wage (NLW) not only increased by nearly 10%, but the age band was also dropped to include 21-22 year olds.

There is ongoing HMRC activity focused on enforcing NMW, which can be quite onerous to manage and logistically complex to respond to. They often issue detailed information requests covering several years. HMRC’s activities involve geographic and sector-based targeted enforcement, alongside the commitment to investigate any worker complaints received through the ACAS helpline. This, coupled with the naming and shaming and 200% penalties, means it should be high on many employers’ risks registers. This is because compliance with NMW regulations goes beyond ensuring that the headline rate is paid. There are multiple factors that can affect NMW, including type of work, unpaid working time and deductions.

There are four types of work for NMW purposes (Salaried, Time, Output and Unmeasured). Many people might believe that those who are paid a salary fall under the salaried work category for NMW purposes. But they may not, and this can have serious implications.

Many employers introduce payroll checks to help with NMW compliance. However, these often do not include sufficient information to undertake complete checks, though they can be useful. This is because the payroll does not often contain the employee types for NMW purposes or actual hours worked. Below are just a few examples of potential pitfalls that could occur in 2024.

Salaried excess hours

The benefit of categorising an employee as salaried for NMW purposes is that an employer can look over an annual period to assess NMW compliance – taking into account the hours worked and pay received for this work. Employers should regularly review the types of work to ensure they are clear on the categorisation and to confirm that nothing has changed. For example, the definition of ‘salaried work’ changed with effect from 6 April 2022 and a worker is only performing salaried work for NMW when all of the following apply:

• they are paid under their contract for an ascertainable basic number of hours per year (the basic hours, see );
• they are entitled to an annual salary for those hours (see );
• they are entitled to no other payment for the ascertainable basic hours except a performance bonus and/or, from 6 April 2020, a salary premium (see & ); and
• they are paid in equal instalments.

Employees can often work before or after their official hours, and a degree of flexibility is to be expected with salaried workers. However, the more excess hours they work, the greater the risk of not paying NMW, assessed over the annual period, unless an annual review is undertaken and pay is adjusted appropriately.

To demonstrate a real-life example, a worker being paid an annual salary of £45,000, contracted to work 40 hours per week, working a single hour of unpaid overtime each day, would mean that they would exceed their annual hours in month 11 and would breach NMW by month 12 if no top-up payment is made.

Top tip: Verify that the employees you consider salaried are categorised as such for NMW. Make sure that salaried employees record their hours and ensure you know when the annual clock starts for a salaried employee and perform the excess hours calculation to see if you comply with NMW or need to make a top-up payment.

Graduate schemes

A simple search of ‘graduate’ on a popular jobs website can show salaries starting from £21,000, whereas the indicate that the annual real median salary of £26,500 has remained unchanged since 2014.

However, NMW rates have recently seen significant increases. The main NMW rate in 2014 was £6.50, compared to £11.44 in 2024. This represents a 76% increase while average salaries have remained constant.

If the graduate does not meet the criteria for a salaried worker, they would almost certainly be completing unmeasured work. This causes the calculation of NMW to change significantly, as each pay period is assessed individually. This means these employees would have to be paid NMW for the actual hours worked in that period or the following one, otherwise a NMW breach would occur. Clear recording of hours is important as is an understanding of what counts for NMW purposes. Training and training time can often be an issue as an employer must account for travel time to any training a graduate may undertake.

For example, a 21-year old graduate categorised as an unmeasured worker, contracted to work 40 hours per week with an annual salary of £25,000, would fall below the NMW in any month with 23 working days if they spend an hour per week travelling to the training provider and this time has not been accounted for.

Top tip: Determine which worker type graduates fall into. Encourage employees to provide logs of actual hours worked. Provide clear instructions on what time counts as working time for NMW purposes. Implement checks to ensure NMW is paid.

Unpaid working time

While it may seem straightforward that employees should be compensated for their working hours, HMRC data shows us that many employers have faced issues due to unpaid additional time. If employees are (whether officially or unofficially) at work or ‘on duty’, that time should potentially also be considered as working hours.

Accurate time recording is essential to compliance and is the best way for an employer to be comfortable that all employees have been paid NMW for the actual hours they have worked. This recording will include all time associated with working, such as:

• travel time;
• time spent changing;
• training time;
• time for security checks; and
• working through breaks.

Consider a factory worker who works 42.5 hours per week and is paid £12.00 an hour. If the employer requires them to arrive 15 minutes early to change into personal protective equipment before their shift starts and it takes another 15 minutes to change out after their shift ends, this amounts to 30 minutes per shift of unpaid time. If this time is not added into their shift and remains unpaid, it would result in an underpayment for each shift worked.

Top tip: Review working practices, identify potential problem areas and ensure any extra time workers spend is recorded and does not push employees below NMW.

Time off in lieu (TOIL)

There are also risks associated with TOIL, where many employers will offer their employees TOIL to compensate for any additional hours of work not paid. Issues can arise when employees would likely be categorised as unmeasured or time workers. In these cases, each pay reference period is assessed separately, meaning that if the hours of TOIL are not taken in the current or subsequent pay period, these will not be accounted for in the NMW calculation.

The example below shows how TOIL could affect a salaried worker for NMW purposes whose calculation year runs from January to December as they began work on 1 January. The employee works 35 hours per week and is paid a salary of £20,821 at NMW. In the lead up to Christmas, a typically busy period, this employee completes 27 hours of overtime within November. The employee’s manager asks the employee to take the TOIL in the following January as this is typically quieter than December.

Given that the employee’s calculation year runs from January to December, this scenario could lead to a potential NMW breach. Under the NMW regulations, the employer is required to pay the employee for all hours worked in the calculation year. As the additional hours are taken off in January, the hours worked will still count in the previous calculation year. Therefore, as the employee is paid at or near NMW, a potential underpayment may arise.

Top tip: Determine which worker type applies. Consider if you should change the calculation year for salaried employees. This can be done in certain circumstances, allowing busy periods to accommodate for TOIL (or excess hours) in the following pay period without causing an NMW breach.

Salary sacrifice 

Salary sacrifice arrangements, such as pension contributions, childcare vouchers, and car and cycle to work schemes, reduce pay for NMW purposes. These benefits are often offered and the risk is heightened when employees are paid close to NMW. However, this risk also exists even when employees are not paid close to NMW, which many employers overlook.

As with the first example, a worker being paid an annual salary of £45,000, contracted to work 40 hours per week, who participates in a salary sacrifice pension (sacrificing 5%), working a total of 13 hours of unpaid overtime per month would mean they would breach NMW by month 12 if no top-up payment is made.

Top tip: Track and monitor employees using salary sacrifice to ensure compliance. This includes not only those with regular salary sacrifice but also any those with one-off amounts, for example, for pension contributions. Consider how this might impact each worker type separately. Put appropriate controls in place.

What should employers do?

Ensuring NMW compliance should be a top priority for all employers. Employers should regularly review their processes and procedures, making swift changes if any breaches are identified. The top tips above should help.

Additionally, from 6 April 2025, HMRC will require more granular detail  on the hours employees work, which is to be submitted via PAYE Real Time Information (RTI). Failure to report accurate data on hours worked could increase the likelihood of being selected for a risk-based NMW review.

If employers have any concerns, we offer risk reviews to identify areas where you can enhance your processes and policies. If needed, we’ll guide you through corrective actions before an HMRC review. Our expertise extends to advising on pay, benefits, and contractual arrangements, ensuring compliance with NMW regulations and minimising risk and administrative burdens. Additionally, we provide support for handling HMRC queries and investigations.

Our team includes lawyers, pay process and procedure experts and former HMRC NMW inspectors.

If you have any questions or concerns about the National Minimum Wage, please contact Susan Ball, Charlie Barnes, Dale Charnock, or your regular 91̽»¨contact.