How to Calculate Employee National Minimum Wage

In the UK, employers have a legal duty to pay their staff no less than the National Minimum Wage (NMW). This pay will vary depending on a worker's age, working time, and location.

Despite these factors, it's important to comply with the laws on the National Minimum Wage. If you don't, you could end up underpaying staff, facing government penalties, and causing reputational damage to your business.

In this guide, we'll look at what the National Minimum Wage is, who's entitled to it, and how to ensure workers are paid correctly

What is the National Minimum Wage?

The National Minimum Wage (NMW) is the minimum payment that employees and workers are legally entitled to.

This legal entitlement comes under the National Minimum Wage Act 1998. The act requires all businesses to pay fair and legal wages - regardless of their size.

Every April, the National Minimum Wage pay rates change. That's because the UK government reviews basic pay per year and amends it based on the current cost of living.

Who is legally entitled to the National Minimum Wage?

Almost all workers and employees (who are at least the compulsory school leaving age) are legally entitled to the National Minimum Wage.

This means every employer has a legal obligation to pay the legal minimum amount to their staff. However, there are some people who don't qualify for it. For example, self-employed people, voluntary workers, or those who are permanently based outside of the UK.

What are the National Minimum Wage 2024 rates?

During the 2024/25 Budget speech, the government stated their intentions for raising the National Minimum and Living Wage amounts. Let's compare the 2024 rates to the upcoming 2025 ones:

Does the National Minimum Wage rate vary for those on an apprenticeship?

Yes - as mentioned, an apprentice will receive their own rate of £6.40 (as of 2024). From 2025, this is set to increase to £7.55.

However, if they're 19 years old or over (and completed the first year of their apprenticeship), they're entitled to the National Living Wage (NLW) or National Minimum Wage rates associated with their age group.

For example, an apprentice is 20 years old and has completed two years of their apprenticeship. Their apprentice rate would be £8.60 instead (which is the correct minimum wage for their age).

What are common causes of underpayment?

There are many scenarios where an employer may end up underpaying workers; i.e., paying them less than their legal minimum rate. Some of the most common causes for underpaying include:

Not paying for all work hours

It's very common to blur the lines on what working time actually is - and what hours you need to pay.

Employers must pay staff for every hour they work for. This includes any time spent doing work before or after their normal hours). Any pay related to training sessions, travel for business, or staying on-call must not count towards their wages.

Offering unpaid work

Offering unpaid work, like work experience, isn't illegal under UK law. However, you may need to offer some type of payment depending on Working Time and minimum pay legislation.

Meaning, if a volunteer completes a substantial amount of work hours, you may be legally obliged to pay them for it. However, it's best to seek advice on how to manage voluntary workers.

Charging for employee expenses

Unfortunately, some employers do choose to charge their staff for employee expenses. This can include things like uniforms, equipment, or any other money costs related to their job.

Charging for employee expenses isn't illegal and might be included in the terms of their contract. However, despite that, you cannot pay them less than the National Minimum Wage rate due to these factors.

Including tips or gratuities

Some employers believe they don't need to pay the legal minimum wage rates if workers receive tips or gratuities from customers.

These additional payments must not count towards a worker's pay - regardless of how much they receive. This includes tips and gratuities left to them directly or through shared pots.

Including service charges

Service charges are often shared between all staff; i.e., like chefs and front-of-house workers in a restaurant. However, just like tips, service charges must not count towards a worker's pay.

It falls on the employer to ensure workers receive their share of service charges if it's part of their employment contract. This payment is usually done directly through a company's payroll where Income Tax is deducted under PAYE.

Making deductions from benefits in kind

Many businesses offer 'benefits in kind' to their workers. These include things like company cars, childcare vouchers, free lunch, and even medical insurance. Non-money benefits like these cannot be calculated into a worker's pay.

The only benefits in kind that you can consider is job accommodation. Employers are allowed to charge £69.93 per week as of April 2024. (This is set to increase to £74.62 per week from April 2025). In these cases, the accommodation offset rate is the most an employer can count towards a worker's pay.

What are the costs of not paying National Minimum Wage?

With any of the cases mentioned above, it's important for employers to ensure their staff are paid correctly.

If a worker believes they haven't, they could report this to HM Revenue and Customs (HMRC). HMRC officers have a right to carry out checks on the employer and their payment records.

If HMRC finds that you haven't paid legal minimum wage, they could issue a Notice of Underpayment to pay back arrears. They may also force you to pay a penalty to the government.

Is the National Living Wage the same as the National Minimum Wage?

No, the National Living Wage (NLW) isn't the same as the National Minimum Wage.

The National Living Wage is a premium payment that some employees are entitled to. As of April 2024, the National Living Wage is £11.44. (Please note that this is set to increase to £12.21 in April 2025, and is available for 21+ workers).

Bear in mind, the National Living Wage varies depending on location. For the UK, it's £11.44; but for London, it's £13.15 as of 2024. (Again, this is set to increase to £13.85 from April 2025).

The 'London Living Wage' is higher because it reflects the cost of living in the capital. A higher rate is given to provide workers and their family enough to afford living essentials.

How to calculate National Minimum Wage pay

All workers (that are at least school leaving age) are entitled to the National Minimum Wage or National Living Wage. This is regardless of their employment status, service years, or job position.

Every employer must ensure their staff are paid correctly based on their hourly rates. In the end, fair salaries will ensure everyone is happy and content with the work they're producing.

Let's take a look at how to calculate the National Minimum Wage pay for your staff:

Work out their pay reference period

The first step involves working out your workers' pay reference period. This period is the average hourly rate over a period of time that workers are paid for.

For example, if a worker is paid weekly, then their pay reference period is one week. These periods cannot last longer than on calendar month.

Highlight any additional payments

Employers then need to outline any additional payments that their workers receive during pay reference periods. This can include things like tips, commission, and bonuses. It also includes any work that's done during this period but won't be paid until the following month.

For example, a worker is paid monthly and regularly does extra shift work at the end of the month. They won't be paid for this work until the following month - however, their overtime pay should be included in the current pay reference period.

Calculate what hours need paying

The next step involves calculating what hours need paying. This will depend on four types of work outlined under the National Minimum Wage law:

• Paid by the hour: This is known as 'time work'.
• Paid an annual salary: This is basic 'salaried hours' that are outlined in an employment contract.
• Paid per task: This is based on 'output work' and can vary depending on projects or pieces completed.
• Paid in other ways: This is known as 'unmeasurable work'.

It doesn't matter if they're paid through a payroll, cheque, or cash-in-hand. It also doesn't matter if people work full or part-time, either. All employees and workers are entitled to the National Minimum Wage pay rate regardless.

Make relevant deductions

The employer must then make any relevant deductions to wages. Remember, National Minimum Wage is calculated based on gross pay - that's wages before Income tax and National Insurance contributions are made.

When calculating their National Minimum wage entitlement, an employer cannot make deductions based on the following:

• Loans and wage advancements.
• Pension payments.
• Retirement and redundancy payments.
• Tips, gratuities, and service charges.
• Rewards from employee suggestion schemes (like performance-related pay).
• Premium elements (like payment for overtime or bank holidays).

Deal with any underpayments

If you've underpaid your workers, it's important to rectify this as soon as possible. Firstly, the employer needs to increase wages to meet the current rates. This method is approved by HM Revenue and Customs; they use it to calculate pay arrears as part of any employer-investigation.

Then, the employer needs to look at previous rates and work out how much they owe to their workers. Be aware, you may need to apply tax deductions and National Insurance contributions to these wages.

Get expert advice on National Minimum Wage with Peninsula

As an employer, it's important to pay workers that are entitled to the national minimum wage or national living wage. This will ensure they're working in a fair and legal manner.

If you don't, you could end up underpaying staff, facing government penalties, and causing reputational damage to your business.

Peninsula offers expert advice on National Minimum Wage. Our teams offer 24/7 HR advice which is available 365 days a year. We take care of everything when you work with our HR employment team.

Want to find out more? Contact us on 0800 028 2420 and book a free consultation with a HR consultant today.