Taking on an employee
Most workers are entitled to a minimum wage by law. If you employ someone, you must pay them at least the National Minimum Wage (NMW) or National Living Wage (NLW).
The rules can be complicated. This section gives a basic overview of the NMW and NLW rules and tells you where to find further information. For an overview of other rules that you may need to consider when taking someone on, go to our dedicated employment law section.
Basic info about the NMW and NLW
Your obligations under the minimum wage rules depend on the arrangement you have with your employee.
If your employee is 1) a family member living in your home or 2) is a non-family member who lives with you as part of your family, sharing housework and leisure activities with your family, then you may not need to pay the NMW or NLW – as explained on GOV.UK.
The rest of this page is for you if these exemptions do not apply.
Almost all employees and ‘workers’ in the UK are entitled to be paid the NMW or NLW – this includes full and part-time employees, agency workers, migrant workers and casual workers. (A ‘worker’ for employment law purposes, is someone who basically undertakes to do or perform personally any work or services for another person as part of someone else's business – see more on 'workers' on our website.)
It is not open to employees or ‘workers’ to opt out of the NMW or NLW.
There are 4 categories of person for NMW/NLW purposes – a time worker, a salaried worker, an output worker and an unmeasured worker. The most common category is a time worker – where workers are paid hourly for each hour in a pay period. It is important to ensure that their pay for every pay period stays above the NMW/NLW for all hours. There is more detail on time workers below.
Pay for minimum wage purposes is the gross pay before deduction of tax and National Insurance contributions (NIC), and deductions from pay such as employee pension contributions (other than pension contributions made under ‘salary sacrifice’ arrangements), but after certain other deductions or reductions have been made.
Salaried worker is the next most common category - if your employee is paid an annual salary, then they are still entitled to the minimum wage so you will need to work out their equivalent hourly rate to see if they are getting the minimum wage. GOV.UK contains information about how to work this out.
NMW and NLW rates
The minimum wage rate depends on a person's age and if they are an apprentice.
Prior to April 2021, the NLW applied to people aged 25 and over and the NMW applied to those under 25 and apprentices.
While the NLW operates as a higher level of NMW for people aged 23 or over, the same rules regarding things like compliance and penalties apply to both NMW and NLW.
From 1 April 2023, the rates that you need to ensure you are paying are:
- £10.42 for people aged 23 and over
- £10.18 for 21 to 22 year olds
- £7.49 for 18 to 20 year olds
- £5.28 for 16 to 17 year olds
- £5.28 for apprentices
An apprentice qualifies for the lower apprentice rate of the NMW if he or she is under 19, or is still in the first year of his/her apprenticeship contract. Apprentices who are over 19 and not in the first year of an apprenticeship contract are paid at the NLW or the rate of NMW appropriate to their age.
The rate that applies depends on their age at the start of a pay period. For example, if you pay your employee weekly, at age 20 they are entitled to the 18 to 20 years old rate. From the first pay week starting on or after their 21st birthday, they become entitled to the 21 to 22 years old rate. So, if you pay them for a week ending on a Sunday and their birthday is on the following Wednesday – they will be entitled to the 21 to 22 years old rate from the Monday after their birthday.
It is important to remember that you must pay at least the appropriate minimum wage – you can pay more.
Employing someone on an hourly basis
Your employee may well be employed by you on an hourly basis, in which case the amount they need to be paid at the end of a week say, or a month (whatever their pay period is) should be calculated according to the number of hours they work.
‘Working’ includes training, clocking in and out time, being on call and working overtime or through breaks. You should make sure you correctly identify the working hours of your employee in each pay period. This is particularly important if your employee works outside of the normal pattern – e.g. if they start early or finish late one day.
Alan works 25 hours for you in a week. He is 28 and is eligible for the rate of £10.42. This means he must be paid at least £260.50 for that week’s work (£10.42 multiplied by 25).
One Tuesday, Alan starts work one hour early to help you with something, so that week you would need to make sure you pay him at least £270.92 (£10.42 multiplied by 26).
You should note that you do not need to pay employees minimum wage for their lunch breaks (provided they are resting) or for their travel time to and from work - although you should ensure they are paid it once any travel time they do as part of their job is factored in – see below for more on this. See our employment law section for more information on rest breaks and working time rules.
On GOV.UK there is also a calculator that you can use to check if you are paying the minimum wage.
Often time workers are paid close to the NMW or NLW rates and therefore risks around extra time worked and deductions and reductions to pay are a big cause of underpayments.
It can be quite difficult to understand and apply the NMW/NLW rules in these areas to some situations that you might come across with your employee. Here we give you some tips on dealing with different scenarios that can sometimes cause difficulty.
Costs incurred by employees
You should also be aware that if your employee incurs certain costs that are connected with work, that are not reimbursed by you, these will have the effect of reducing the amount of pay they are taken to have received from you.
For example, for minimum wage purposes, if a worker has to pay for an item of ‘everyday’ unbranded clothing to wear as part of a uniform, such as a pair of black trousers, black shoes or a white shirt, the cost incurred must be deducted from their pay to establish whether at least the minimum wage is being paid.
It is probably counter-intuitive to employers that they need to essentially reimburse staff for such clothing, which may well be worn outside the workplace and which the worker may have bought anyway for their own benefit. In fact, tax law and minimum wage rules diverge somewhat on this issue. Under tax law, the rules are stricter disallowing a deduction for tax purposes on such clothing. A deduction can only be permitted for clothing that is recognisably a uniform or part of a uniform.
To the extent that employees can claim tax relief on their employment costs to help restore their out-of-pocket position, employers should not count potential tax refunds as ‘reimbursements’.
You should be careful about making deductions from your employee's pay in respect of items or expenses that you have provided that are necessary for their employment (such as for a uniform) as these cannot bring down the pay rate below the NMW or NLW.
Jenny (over 23) is paid £10.50 an hour for 40 hours per week. Jenny has earned £420 but then a deduction of £55 is made for a uniform that she has been given, so she only received £365 or the equivalent of £9.13 an hour, which is below the NLW.
You can find confirmation of this rule on GOV.UK.
You should also be aware that making an administration charge in respect of processing an employee’s attachment of earnings order can reduce their pay for minimum wage purposes.
Travel time and costs
You should make sure that your employee is paid at least the NMW or NLW rate for all hours worked, including travel time (which means travelling in connection with work, e.g. driving to a meeting, but not travelling from their home to place of work) – and associated out of pocket expenses such as vehicle mileage.
Wali is 35 years old and is paid weekly. Last week she was paid £10.65 per hour for 30 hours work (£319.50). However, Wali spent 3 unpaid hours that week travelling to a business meeting, so the minimum amount to be paid to her should be £10.42 x 33 hours – £343.86. Wali has been paid below the NLW. Her employer needs to top up her pay by at least £24.36 so that the NLW rules are met.
If Wali also incurred £20 of travel costs for those three hours of travelling, her pay would be taken to be £299.50. When we compare this to the bare minimum she should have received, £343.86, she has been underpaid by £44.36.
Tips do not form part of minimum wage remuneration, so must be paid to employees on top of minimum wage pay, (even though for tax purposes they are counted as ordinary taxable pay on the employee and are not viewed as anything extra or special).
Differing pay rates
You should make sure that your employee's basic rate of pay meets the relevant minimum wage. You may pay them an inflated rate for working on a Sunday for example, but can’t use this to disguise a low rate for the rest of the week.
Carrie (aged 19) is paid weekly. Last week she was paid £232.50 for 31 hours work, which averages £7.50 an hour. On the face of it, £7.50 per hour looks like it meets the applicable minimum wage (£7.49), but actually, 8 of the hours were paid at £8 for a Sunday shift – which is supposed to represent a 50p premium on her usual rate.
If we strip out the ‘premium’ amount she received for her Sunday shift (8 x 50p = £4), Carrie's basic rate actually works out at £7.37 which is below the NMW (£228.50 divided by 31).
Where workers undergo training (for example – employment induction or skills development) the time spent on such activities is working time for minimum wage purposes where a contract of employment has started or where it is a contractual requirement for the worker to attend the training. So, if you pay £80 for your employee (aged over 23) to attend an 8-hour long health and safety course, then you would also have to pay them at least £83.36 (£10.42 x 8) for their wages for the day on top of the cost of the course (and probably more, once their travel time is factored in).
You can see what other things count as working time on GOV.UK.
A salary sacrifice arrangement is an agreement to reduce an employee's entitlement to cash pay, usually in return for a non-cash benefit. This can have tax/NIC advantages for both you and them.
Employees are allowed to salary sacrifice for tax/NIC purposes for benefits that the government wants to encourage such as pension saving. However, for minimum wage purposes – all salary sacrifice is problematic if it takes your employee's pay below the minimum wage – no matter what the benefit.
Neena, 38, works as a cleaner. She generally works around 35 hours a week at £10.90 an hour. At the moment she can give up £16.80 of her £381.50 weekly pay packet and get childcare vouchers instead (bringing her cash pay down to £364.70 but still at the minimum wage rate of £10.42 per hour) and saving her tax of £3.36 and NIC of £2.02, a total of £5.38 each week.
If the minimum wage rate for her circumstances goes up to, say £10.90 in April 2024, then assuming Neena still works 35 hours a week and does not have a pay rise, Neena would not be able to sacrifice any of her pay for childcare vouchers, as the minimum amount of cash that her employer must pay her is now £381.50.
What to do if you discover a shortfall
If your employee has not been paid the correct minimum wage, they are entitled to be paid a sum representing the shortfall. If you discover the shortfall, you should make an additional payment to your employee representing the shortfall as soon as is practicable, as well as ensuring that future pay rates are set above the appropriate minimum hourly rate.
Self-correcting an error, means that if HMRC (who are responsible for compliance) undertake an investigation, they won’t find an underpayment and you can avoid any action being taken against you.
However, employers have to ‘self-correct’ accurately. It is also important that when they pay any extra amount over that it is clearly identified as NMW/NLW arrears. As part of the self-correction process, they must check back up to six years to make sure there have been no similar failings.
Don has an employee Jake, who is 24. On 1 May 2023, Don realises he is still paying Jake £9.50 an hour – the rate for those aged 23 and over from 1 April 2022. Don has missed the 1 April 2023 changes which mean that Jake’s rate should now be £10.42.
Don immediately calculates, based on Jake’s hours in his monthly pay period of 1 April 2023 to 30 April 2023 of 151 hours, that there has been an underpayment of £138.92 (the difference between £9.50 and £10.42 x 151 hours). As well as putting things right going forward, Don pays the extra £141.50 to Jake in May 2023.
In calculating the amount to be paid to your employee in respect of the shortfall, you should use the current NMW/NLW hourly rate, even if the shortfall occurred at a time when the rates were lower. This is in recognition of loss of purchase power your employee may have suffered from the initial underpayment.
The way that you work out the amount you need to pay is by using the formula (underpayment/original rate) x current rate.
Jane, who is 38, works out that she was underpaid the minimum wage by £256, during the period May to September 2018. During this time, her minimum wage rate was £7.83. However, it is now £10.42. Rather than pay Jane the £256, the employer must pay Jane £340.68 (that is, £256 divided by £7.83 multiplied by £10.42).
If your employee discovers the shortfall and you have not self-corrected it, he or she can report you to HMRC and/or make a claim to the Employment Tribunal.
You should be aware that correcting a shortfall may also mean that you are required to pay additional PAYE tax/NIC to HMRC on a backdated basis and pay additional pension contributions to your employees’ scheme.
HMRC have some guidance on dealing with pay arrears for tax and NIC purposes in section 1.19 of their CWG2 booklet (Further guide to PAYE and NIC).
Essentially, employers should deduct PAYE tax at the rates that were in operation for the years to which the arrears are attributable and in accordance with the employee’s tax code for the year and as if the additional pay had been paid at ‘week 53’ for the year.
The NIC element is worked out differently and is calculated on the basis of the year the payment is made only: it is not related back to prior years.
If correcting a minimum wage error means that you need to pay more pension contributions, you should speak to The Pensions Regulator or the pension scheme provider concerned for further instructions.
Minimum wage compliance
HMRC are responsible for enforcing the minimum wage. As well as reacting to individual complaints, HMRC minimum wage officers also conduct proactive risk-based enforcement.
It is important to understand that HMRC will investigate 100% of complaints they receive. Complaints can be made anonymously by workers and once received, HMRC will start an investigation against an employer, covering all aspects of NMW/NLW risk, not just the complaint itself. HMRC’s proactive investigations have typically been driven by risk profiling sectors. So, for example, HMRC will open a small number of investigations in a sector, learn the typical NMW/NLW risks and the dynamics of the sector, and will then replicate this with other businesses in the sector.
If HMRC discovers or believes there is a shortfall, it can do things like:
- Issue a notice of underpayment requiring the employer to pay arrears;
- Require the employer to pay 200% of the total underpayment, or £100 (whichever is the greater), up to a maximum of £20,000 in respect of each worker identified in the notice of underpayment (the penalty is reduced by 50% if the employer complies with the notice within 14 days of its service);
- Name and shame the employer.
The employer can appeal against any notice of underpayment if they believe that there is no underpayment or that the amount in the notice is wrong. They can also appeal against any penalty imposed by HMRC.
A few employers try and sidestep the minimum wage rules, by doing things like paying cash-in-hand so that hours and wages go unrecorded and forcing workers to say they are self-employed. However, you should know that there are also a number of criminal sanctions for employers not paying someone the NMW or NLW or falsifying payment records.
You can read more about the consequences for employers of not paying the minimum wage on GOV.UK.
You can read the government’s guidance on its approach to enforcement of the minimum wage on GOV.UK.
Getting help with NMW/NLW
There is a comprehensive employer guide to calculating the NMW and NLW produced by the Department of Business, Energy and Industrial Strategy that you may find helpful, as it covers more complex topics. HMRC's technical manual can be found on GOV.UK.
If there is any uncertainty for you at all about the NMW or NLW, we advise that you contact the ACAS Pay and Work Rights helpline on 0300 123 1100 for further advice.