Budget: National Minimum Wage (NMW) risk for salaried workers

The latest National Living Wage (NLW) and NMW rates were confirmed in the Budget:

The rate increases put more salaried workers at risk of being underpaid NMW, and this trend is likely to continue as the Government moves towards a single adult rate. The new NMW rates, together with the increase in employers’ NIC, will also increase the cost of settling historical NMW underpayments from April 2025, and mean that future employment costs will significantly increase.

The NMW increase also brings the NMW and Real Living Wage (RLW) rates closer together (e.g. the highest rate of NMW will now be only 39p per hour below the RLW rate for outside London). Although there are differences between how the NMW and RLW are calculated, RLW employers cannot assume that there’s no requirement for them to monitor their NMW compliance closely.

HMRC’s enforcement team continue to carry out investigations and identify employers that fall foul of technicalities in the legislation. During the course of a review, HMRC usually initially focus on how worker type is established and the payroll controls to monitor pay and worked hours. We are increasingly seeing HMRC carry out detailed reviews of salaried workers and challenge that they are being underpaid. Salaried workers often fall outside of NMW monitoring because working hours are not recorded and salaries appear to be relatively high.

Unfortunately, the legislation governing NLW/NMW calculations for salaried hours workers includes many complexities that employers must understand before establishing processes and controls to monitor compliance for this group of workers.

In summary, NLW/NMW compliance for a salaried hours worker is assessed over their ‘calculation year’ so, overall, the worker must receive the minimum hourly rate for total hours worked over that period. This means that whilst most salaried workers will not be identified as breaching the minimum hourly pay rate for each pay period in which additional hours are worked, when looking at the full year (a particularly complex calculation) any overtime/excess hours worked might cause a salaried worker to fall below the NLW or the applicable NMW across the full year. For example, a salaried hours worker contracted to work 40 hours per week for £54,000 per year, working an extra hour per day will be underpaid NMW in 2025/26.

Whilst many salaried workers work flexibly to meet the needs of the business, their employers don’t monitor and record their working time. Where records don’t exist, HMRC will often gather information from workers and extrapolate results to assess NMW risk and quantify underpayments.

The risk of underpaying salaried workers increases when other risk factors are present that reduce pay (e.g. salary sacrifice, savings clubs etc), pay is calculated incorrectly (e.g. NMW pay for salaried workers excludes premium payments) or working time is not fully recognised (e.g. changing time, online training at home etc).

There are a number of points employers can consider to manage their risk, including ensuring that they:

• Record NMW worker type (salaried hours, output, time, unmeasured) for each employee so that the correct NMW controls are in place to establish and assess pay and working time;
• Understand the impact of the changes in the definition of ‘salaried work’ from 6 April 2022;
• Consider setting a single calculation year that applies to the salaried workforce to ease monitoring compliance;
• Review Time Off In Lieu (TOIL) and overtime policies for salaried workers, and how working time is recorded and can be evidenced to HMRC in the event of a NMW compliance review;
• Review pay elements to identify pay that can be included in the calculation of NMW (whilst premium payments no longer preclude workers from meeting the conditions for being a salaried hours worker, these payments cannot be included in the calculation of their NMW pay);
• Identify workers’ basic contractual hours to identify if and when they are breached so that the excess hours calculation can be prepared; and
• Establish a policy for dealing with excess hours once they start to accrue.

Failing to pay the NLW/NMW means:

• Making good underpayments to workers which are grossed up at NMW rates in force at the time of the settlement;
• A penalty of 100 – 200 percent of the underpayment;
• Historic payroll deductions and amendments to historic PAYE Real Time Information returns (including interest on late paid PAYE);
• Employer’s NIC at the rates in force when the payment is made to the employee – as the Budget announced a significant increase in employer’s NIC to 15 percent any underpayments settled on or after 6 April 2025 will attract the higher rate;
• Review of historic pension auto-enrolment processes to identify any pension underpayments; and
• The reputational risk of being publicly named for contravening the rules.

Our team of NMW, employment tax, payroll, and legal experts help employers design, implement, operate, and remediate their NMW compliance systems and processes.

For further information please contact:

• Josiah Greenall
• Gareth Dennett