Time ticking to review NMW compliance calculations

While the focus will currently be on ensuring payroll and HR systems are updated to accommodate the new National Minimum Wage (NMW) rates that will apply from 1 April 2025, employers should also be taking this opportunity to perform a spring clean of their NMW compliance practices.

Employers are legally obliged to repay any underpayments of NMW to all current and former workers over the last six years. Failing to do so exposes them to a 200% financial penalty applied to any underpayments, as well as reputational harm from the public naming and shaming scheme run by the Department for Business and Trade. 

However, the date at which the repayment is made to the worker can impact how much the employer must repay. This is because the employer must make the repayment based on the NMW currently in force at the date of repayment, rather than the NMW rate at the time that the underpayment arose.

This means that a repayment made in March 2025 will be lower than a repayment made in April 2025 as repayments made from April 2025 will need to be uplifted to the new rates (ie £12.21 rather than £11.44 for those aged 21 and over). 

For example, if a worker is paid the National Living Wage of £11.44/hour from 1 April 2024 but has been allowed to join the employer’s pension salary sacrifice scheme, this will result in a breach of

NMW and an underpayment of £0.57 for every hour worked in each pay reference period. This is on the assumption that all basic pay is treated as pensionable by the employer and the worker is exchanging 5% of salary for pension contributions.   

If the worker works 2,080 hours over the course of the year (roughly the equivalent of 40 hours per week), that equates to a total underpayment of £1,189.76 between 1 April 2024 and 31 March 2025. 

However, if the underpayment isn’t repaid until 1 April 2025, the uplift applies, taking the total underpayment to £1,269.84—an increase of approximately £80.

NMW uplift calculation

To calculate the underpayment when a different rate of NMW applies at the time of repayment compared to when the underpayment arose, the following formula is used:

(Total underpayment/rate of NMW when underpayment took place) x rate of NMW when repayment made.

Confusingly, the employer must apply the NMW currently in force for the age the worker was when the underpayment arose. 

NMW underpayments are rarely isolated to a single worker; they tend to apply to the whole workforce or a large population of workers. If in the example above, the employer has 1,000 workers who have been allowed to participate in the pension salary sacrifice scheme, the uplift rises from £80 to £80,000, on top of an already significant underpayment being repaid to employees. 

In addition, the employer will have to pay employers’ National Insurance Contributions (NICs) and the apprenticeship levy (if applicable). If the repayment is made prior to 6 April 2025, the employer only has to apply employers’ NIC at the rate of 13.8%, rather than the increased rate of 15%. 

Key NMW risks when reviewing compliance

With NMW risks rising as a consequence of complex rules, HMRC’s targeted enforcement, and public awareness campaigns, employers should make it a priority to check they are compliant.   

Below are some common NMW risks employers should be aware of when reviewing their compliance practices:

• Incorrect worker categorisation.
• Salary sacrifice.
• Payroll deductions.
• Failing to pay for all working time.
• Uniform and equipment costs.

If any underpayments are identified, getting them paid before 1 April 2025 not only avoids the risk of a penalty and naming and shaming but could also save employers considerable costs. 

The NMW compliance clock is ticking, and employers may wish to consider their wider NMW compliance in advance of increased cost implications from April 2025. 

To ensure that your business is fully compliant with the new NMW rules or to mitigate potential risks, please contact Charlie Barnes or Dale Charnock.