The introduction of the National Minimum Wage (NMW) was a huge step forward in protecting workers’ rights and ensuring fair pay. However, many employers unintentionally fail to comply due to common and often avoidable mistakes.
Our expert payroll team discuss NMW in more detail and highlight some of the top mistakes they see to help you avoid potential fines and reputational damage.
What is NMW?
The NMW is the lowest hourly rate that nearly all workers are legally entitled to receive. The National Living Wage (NLW) is different, it applies to all workers aged 21 and over.
These are the current NMW rates (per hour):
Apprentices: £7.55
Under 18s: £7.55
18-20: £10.00
NLW 21 and over: £12.21
The above rates came into effect from 1 April 2025. For employers and businesses, knowing and applying the correct rates is essential to ensure compliance and avoid costly mistakes or penalties.
Mistake 1 – incorrect pay calculations
Failing to increase workers’ pay in line with annual NMW/NLW rate changes can be a crucial mistake. It is important to note any milestones such as significant birthdays within a system, to ensure pay is updated in advance and you are in line with regulations. Another frequent error is miscalculating average hours, particularly for salaried workers with irregular or fluctuating hours. To avoid this, having a system in place to track hours worked will help with calculating take home pay each month.
Mistake 2 – salary exchange calculations
Salary exchange is a tax-efficient arrangement where employees agree to sacrifice part of their salary in exchange for an increased employer pension contribution. When calculating take home pay, it is important that only the reduced cash salary is counted, not the value of the benefit received, as the total amount must not fall below NMW.
Mistake 3 – not understanding payrolling benefits in kind
Payrolling benefits in kind (PBIKs) is a process where employers include the value of certain benefits provided to employees in their payroll. This means that the tax due on these benefits is collected in real-time through the PAYE (Pay As You Earn) system, rather than being reported separately on a P11D form at the end of the tax year. Employers can avoid mistakes with Payrolling Benefits in Kind by clearly identifying qualifying benefits, keeping accurate records, ensuring payroll systems are updated, and regularly reviewing tax deductions.
For more information on the upcoming changes to payrolling benefits in kind read our blog here.
Mistake 4 – ignoring overtime and breaks
Another area that is often mistaken is overtime and breaks, with employers failing to properly account for them in wages. It is important that all overtime, breaks, and any other time worked is accurately recorded. To do this, employers should have clear systems in place to track hours worked, ensure payroll teams fully understand NMW rules, and regularly review timesheets against pay records to identify any mistakes in advance.
Mistake 5 – wage deductions
A common mistake in payroll is when businesses deduct job-related expenses directly from wages. Costs such as travel or uniforms are considered work-related and can only be deducted if this is clearly set out in writing, for example in the employee’s contract. Employers should also ensure that any deductions do not reduce pay below the NMW and that employees are fully informed of the reason for the deduction.
Mistake 6 – not understanding trial periods in employment
Trial periods can be a useful way to assess whether a worker is suitable for a role, but employers must remember that time spent on a trial shift counts as working time. This means workers are entitled to receive at least the NMW for the hours worked, regardless of whether they are offered the job.
What happens if you fail to comply?
Failing to comply with the rules and regulations could lead to serious consequences for your business and cause damage to your company’s reputation. Employers found to be underpaying staff must repay the arrears in full and can face financial penalties of up to 200% of the total underpayment, which is capped at £20,000 per worker.
Get in touch
If you wish to discuss any of the above matters in further detail or explore the possibility of outsourcing your payroll to avoid any potential compliance errors, please get in touch with Julie Mason, director of payroll at PM+M using the button below.
