National Living Wage: Common Questions Answered

Each time new regulations are introduced, they throw up many questions that need to be answered to be sure of compliance. On 1 April 2016 the national living wage (NLW) of £7.20 per hour became the minimum amount that employers could pay workers aged 25 or over. Here are our answers to some of the most commonly asked questions about this.

When did the NLW have to start?

On the first day of the pay reference period that fell on or after April 1^st.

What does not count towards the NLW?

To be sure that the NLW has been paid for any pay reference period, you should not include the following elements in the calculation: 

•  Employer pension payments
•  Repayments of expenses
• Benefits in kind
• Shift premiums
• Overtime
• Advances of wages
• Loans

When all these elements have been excluded, the worker should be paid a minimum of £7.20 per hour for every hour worked. The gross amount calculated can include bonuses, commission and incentive pay.

How should holiday pay be calculated?

You should include any regular overtime undertaken as well as a worker’s normal or average working hours when working out holiday pay.

Must I pay the NLW to apprentices who are over 25?

Yes, unless they are still in the first year of their apprenticeship, in which case the relevant band of the national minimum wage still applies.

What happens when a worker turns 25?

He or she will not be eligible for the NLW until the first day of your next pay reference period. They must be paid the NLW for the period following their birthday.

When will the NLW next increase?

The government intends to review all the statutory minimum wage rates to introduce any changes by April 1^st each year, beginning in 2017. The NLW rate will gradually increase until 2020, when it is intended to have reached £9 per hour.

How does the NLW apply to those paid a fair piece rate?

If they are over 25, these workers are eligible for an additional 20% on the normal NLW. You should pay them £8.64 per hour.

How will the NLW be enforced?

The consequences of not paying the minimum rates that apply could be financially crippling and are designed to be a good deterrent to non-compliance. An HMRC compliance officer can order an employer to pay any arrears to the workers and pay a fine of 200% of the underpayment for each worker. Serious cases may be criminally prosecuted, in which case there is no limit to the fines that can be imposed following a guilty verdict.

The questions listed above are those that are most commonly asked. If you are not clear about any of the answers, or have other queries, your local bookkeepers will be happy to help. 

Is Your Business Prepared for the National Living Wage?

April 2016 will see the introduction of the compulsory national living wage.

The new minimum wage of £7.20 per hour is set to become law for all working people aged 25 plus. The National Living Wage (NLW) will have to be paid as a minimum by all employers, and the Government aims for it to rise to £9 per hour by 2020.

The Office for Budget Responsibility (OBR) has said that the estimated cost to businesses will represent 1 per cent of profits. But the costs will be offset with a cut in corporation tax in 2017 to 19 per cent, and further down to 18 per cent in 2020. National insurance contributions for smaller companies will also be cut in an attempt to balance the wage rise.

“From 2016, our new Employment Allowance, will now be increased by 50% to £3,000,” announced the Chancellor George Osborne. “That means a firm will be able to employ four people full time on the new national living wage and pay no national insurance at all.”

The national minimum wage rose to £6.70 in October 2015, and the over 25s will see a 50p per hour pay rise from April 2016. That is a hike of 11 per cent for employers.

The Living Wage Foundation set a rate of £7.85 as the figure they deem appropriate, and the rate of £7.20 would seem a step closer. However, Rhys Moore, director of the Living Wage Foundation, said it was “delighted” that more than 2.5 million workers will receive a much needed pay rise, but then asked, “Is this really a living wage?

What Business Organisations Think

John Cridland, director-general of the Confederation of British Industry, said: “This is a double-edged budget for business. Firms will welcome measures to balance the books and boost investment, but they will be concerned by legislating for wage increases they may not be able to deliver.”

Chief economist for the Chartered Institute of Personnel and Development Mark Beatson said, “This policy will only deliver higher pay without significant job losses if it is accompanied by a drive to increase productivity in low pay sectors such as retail, hairdressing, hospitality and the care sector – and that will need more than delivery of apprenticeship numbers or employment subsidies via the national insurance contributions system.”

If you are concerned as to how the new National Living Wage will affect your cashflow and profit, don’t delay in discussing it with your bookkeepers who will be able to put you in the picture with forecasts and practical advice.