NLW and NMW rate increases

With every business looking to manage down wage costs from 1 April because of the employer’s NIC increases, further significant increases to the National Living Wage (NLW) and National Minimum Wage (NMW) rates from the same date make this a more difficult task.

• For the National Living Wage (NLW), the rate for over 21s is set to rise to £12.21 an hour.
• For the National Minimum Wage (NMW), the rate for 18–20s is increasing to £10 an hour, and to £7.55 an hour for under 18s and apprentices.

This means that managing NMW compliance should be a high priority task alongside any cost control measures you are implementing.

Ensuring good NMW compliance is often about robust processes to avoid inadvertent mistakes, and this remains the case. For example, the buffers between your employee’s actual pay and NMW levels may have been eroded over recent years given the rapid increases in NMW rates, but there are options within the rules that may help to boost those buffers.

Pay buffers provide not only NMW compliance protection but also provide a potential opportunity for employers and employees to make cost savings and minimise the impact on recruitment and retainment of key workers. Areas for consideration for both compliance and cost saving opportunities are:

• NMW worker type – Are your NMW worker types correct? As these define the regularity with which businesses must perform NMW compliance checks, can they be amended to better suit the business?
• Pay elements – Has the correct qualifying NMW pay been determined? Can more pay elements be included to increase a worker’s pay buffer to minimise NMW risk?
• Deductions – Do deductions taken from workers cause a reduction in NMW pay? Can deductions be restructured?

While finding cost savings is understandably high on business agendas currently, employers need to do this carefully. Getting NMW compliance wrong can be both financially damaging with penalties of up to 200% and the risk of being included on the Government’s public name and shame list can put an expensive dent it the business’s reputation.

Don’t forget, although low paid employees are obviously the biggest risk population, employees high up the pay scale can also be impacted. In fact, HMRC routinely check compliance for workers earning up to £35k per annum.

How active are HMRC’s NMW enforcement teams?

We are continuing to see an increase in HMRC’s NMW enforcement activity and the volume of enquiries each year, so more businesses are likely to see their NMW compliance checked by HMRC. Below are some highlights of current HMRC enforcement activity in the UK:

• sector focus – targeted reviews of specific sectors (e.g. hospitality, retail and recruitment agencies);
• geographical targeting – recently announced targeting of the London and Yorkshire regions;
• repeat visits – visiting employers who have previously had an HMRC NMW enquiry in the last five years;
• writing to workers – contacting workers directly to raise awareness of potential issues and how to make a complaint to HMRC;
• increasing public awareness – mainstream media coverage, naming list being covered by local and national press.

The latest Government reports show one of the most enforced amount of NMW arrears was between 1p and 5p per hour. This highlights how seriously HMRC take NMW compliance. These underpayments were not all as a result of not paying the legal rates but can be due to misinterpretation of the legislation as well as not having robust controls and processes in place.

What are the consequences of getting things wrong?

HMRC can go back six years for current and ex-worker underpayments. Any underpayments are required to be paid at the rate in the year it is made good, not the rate at the time of the breach.

The new 2025 NLW rates are 39% higher than the rates in 2019, meaning a mistake made in 2019 could cost employers 239% more in 2025 to correct (when you factor in the potential penalty position). With more frequent naming rounds being promised, proactive action now can have both financial and reputational benefits for impacted businesses.

What can you do to prepare ahead of 1 April 2025?

While it is important to consider the impact of the increase, it is worth remembering that NMW compliance is more complex than simply paying at the correct rates. A good starting point to check your NMW compliance is making sure your team understand the key rules. Do they know:

• there are four different sets of rules for calculating NMW pay, dependent on which NMW category your workers fall into;
• a worker can potentially include a director;
• working time is often not just the time a worker spends at their workstation;
• not all payments made to a worker count for NMW purposes;
• many deductions made, even when they benefit a worker, can reduce NMW pay (e.g. savings clubs, social clubs, employer-owned goods and services).

If you are not considering these issues when conducting NMW checks or implementing NMW process and controls, then you are more likely to make mistakes and inadvertently underpay your workers. For example, if you are considering implementing new benefits instead of or alongside pay increases, how will these affect the NMW position for employees?

Lastly, many employers are taking the opportunity to review their overall pay governance in advance of the introduction of the Government’s Fair Work Agency (FWA) from 2026. The FWA will focus on enforcement of employment rights such as Statutory Sick Pay and Holiday Pay alongside NMW – so good governance in these areas will be key going forward.