1 April 2022 sees a significant increase to the National Living Wage (NLW) and National Minimum Wage (NMW). These represent some of the highest NLW/NMW increases to take place in recent years.

According to the government, the 59p hourly boost, to the NLW, will mean a full-time worker on NLW will get a pay rise of more than £1,000 per year.

In light of the upcoming changes, employers should now review the measures they have in place to ensure that they do not inadvertently pay staff less than what they are entitled to.

What are the new rates?

As from 1 April 2022, the changes to the NLW/NMW will be as follows:

Age 2021 rate 2022 rate      Increase
23 years and above £8.91 £9.50 6.6%
21-22 year olds £8.36 £9.18 9.8%
18-20 year olds £6.56 £6.83 4.1%
16-17 year olds £4.62 £4.81 4.1%
Apprentices £4.30 £4.81 11.9%

What impact will this have on employers?

This significant increase puts additional financial pressure on employers. If underpayments are discovered, the cost of making good is also increased as all underpayments are required to be uplifted to the current NLW/NMW rate when paid, not the rate in force at the time the underpayment occurred.

Are you meeting HMRC’s requirements?

The NMW rules are complex, and HMRC are actively pursuing employers where they consider underpayments have occurred. Employers should review their processes to ensure no errors are made. Most employers consider that they pay employees above NMW, but many find that they have inadvertently made errors that lead to underpayments.

The areas where we often see these errors are:

  • Failure to identify all working time
  • Failure to Identify all pay elements included/excluded in NMW
  • Calculating NMW incorrectly, e. using overtime rates etc within the calculation
  • Failure to identify deductions from pay that reduce pay for NMW purposes, i.e. contractual deductions when employees leave, cost of providing/replacing uniforms, charging administration costs for transactions etc
  • Impact of requiring employees to wear specific colour/type of clothing when carrying out employment duties, i.e. black trousers
  • Failure to keep accurate records

Where employees operate salary sacrifice schemes, employees are not allowed to sacrifice their pay below the NMW, so payroll systems should be reviewed ahead of the 1 April increase.

Employers should also ensure that pay is reviewed for any employees approaching their 23rd birthday, to ensure they are meeting the NLW requirements.

HMRC is responsible for ensuring that employers correctly apply the NMW/NLW and have invested heavily into compliance teams who police the system. We are currently seeing increased activity with HMRC NMW inspections.

When HMRC carry out NMW Inspections, it is usually because they consider that an underpayment of NMW has occurred. The majority of NMW inspections are initiated by calls to HMRC’s Employee Hot Line from current or ex-employees who claim that they have been paid below NMW. HMRC are required to follow up every call they receive, which will typically result in a NMW inspection.

Even if no issues are identified, a NMW inspection can be very time consuming and intrusive, typically covering the whole workforce. HMRC will review all records, and interview employees – not just the complainant.

If an error is discovered, in addition to having to make the repayment to affected employees at the current NMW/NLW rate, rather than the rate applicable at the time of the initial underpayment, HMRC charge a penalty of up to 200% of the underpayment, with the minimum penalty being 100% of the underpayment if the repayment is made within 14 days of HMRC’s Notice of Underpayment being issued. Full details of the employers who have underpaid employees are also included on HMRC’s publication of businesses that have breached NMW rules.

How we can help

NMW is a significant risk area, where settlements for underpayments are significant, but it is also an area that is often overlooked by employers.

For further guidance on the complex NMW legislation, or advice on actions to take in the event of a HMRC NMW inspection, please do not hesitate to get in touch with our specialist employment tax team.