Every small business that employs workers in the UK has to understand the difference between the National Living Wage, National Minimum Wage, and the Living Wage. Employees are legally entitled to a certain level of compensation, and there are substantial penalties for failing to pay employees correctly.
What Is the Difference Between the National Living Wage and the National Minimum Wage?
The terms minimum wage and living wage are often used interchangeably, but the criteria for applying these wages differ.
Most employees under the age of 25 are entitled to the National Minimum wage per the National Minimum Wage Act. The minimum wage amount is set annually by the Government, based on recommendations by the Low Pay Commission.
The National Minimum Wage is applicable to most workers younger than 25, except self-employed people, company directors, volunteers, members of the armed forces, or family members of the employer living in the employer's home.
Workers are also entitled to the correct minimum wage even if they are part-time, casual or agency workers, workers paid by the number of items they make, trainees or workers on probation, agricultural and foreign workers, and offshore workers.
National minimum wage rates are dependent on the age of the worker and whether or not they are an apprentice. For example, in 2023, the correct minimum pay per hour payable to 23-year-olds and over is £10.42, while an apprentice or an employee under the age of 18 would earn £5.28 per hour. The National Minimum Wage rate applies to all workers under the age of 19 employed on a Contract of Apprenticeship as well as apprentices aged 19 and older in the first year of Apprenticeship.
The National Living Wage is the minimum wage paid per hour to almost all workers aged 25 and over and is mandated by law. The National Living Wage is set by the Government as an hourly rate, which is amended annually. Unlike the National Minimum Wage, there are no age ranges that change the amount paid to employees. The National Living Wage rate is typically higher than the National Minimum Wage.
This is not to be confused with the so-called "real" living wage, an hourly rate based on the cost of living in the UK. The Living Wage Foundation calculates this amount annually, although it is not legally binding. They recommend that workers are paid a minimum amount of £9.90 per hour and the London living wage at £11.05 per hour to manage their living costs.
The National Living Wage is calculated based on a proportion of earnings, which is why the living wage recommended by the Foundation is almost always a higher rate than the official National Living Wage.
Penalties for Non-Payment
All employees must pay their workers the correct minimum wage or a living wage to avoid fines. Falsifying payment records or underpaying workers can have devastating consequences. Fines of up to £20,000 (per worker) apply to employers who do not pay the National Living Wage rate or National Minimum Wage rate as required. They may also be banned from serving as a company director for up to 15 years.
Remember that your employees are not only entitled to the National Living Wage or National Minimum Wage by law but that paying workers a fair wage will improve morale, retention and productivity in the long run.
The UK government provides tools that can be used to correctly calculate the lowest wage payable, along with several other payments, online. You can access the calculator here: https://www.gov.uk/minimum-wage-calculator-employers.
Pay That Counts Towards the National Minimum Wage And National Living Wage
National Minimum and Living Wage is calculated on gross pay (before tax or National Insurance is deducted). Gross pay includes basic pay as well as other types of pay, e.g. sales commission, bonuses, or performance-related incentives. Pension payments, retirement lump sums, advances of wages, loans, overtime, tips and redundancy payments should be deducted from total pay before calculating the National Minimum Wage and Living Wage amount.
Some payments will reduce the National Minimum Wage and Living wage payments due, including refunds of money spent in connection with work, e.g. purchasing a uniform. For example, Joseph is 29 years old and works 40 hours per week at £10.42 per hour or £416.80 per week. He rents a uniform for £15 per week. The money is not refunded. To calculate his minimum wage, the employer must deduct the rental of the uniform from his pay.Joseph earns £416.80 per week minus £15, or £10,05 per hour. This is below the National Living Wage requirement, and his employer needs to pay the arrears.
Benefits in kind, or anything the employer provides for the benefit of the employer apart from pay, cannot be counted towards the National Minimum and Living Wage, except for a single amount for accommodation. This may include meals, fuel, a company car, medical insurance, lunch vouchers and child care vouchers.
The value of accommodation can be counted towards the employee's National Minimum and Living Wage pay, known as the accommodation offset. These charges are set at £60,90 per week, and an employer cannot count more than the offset rate towards the National Minimum Wage or National Living Wage.
For example, Sally is 27. She works 40 hours per week at a resort for a wage of £9.00 per hour. Her employer provides a cottage on the premises. While the employer could rent the cottage to holiday-goers for £500 per month, he may only count £243.60 in rent towards her wages. In total, Sally earns £1440 per month plus £243.60 in accommodation, or £10.50 per hour. Her total compensation falls within the National Living Wage rate.
Knowing the difference between the national minimum wage and the living wage is the best way to stay on the right side of the law. Ensuring that all employees are receiving the correct minimum pay per hour that they are entitled to will not only avoid costly penalties but help your employees manage their cost of living.