Understanding your responsibilities when it comes to the National Minimum Wage

I can't afford to pay employees National Minimum Wage or National Living Wage

While an increasing National Living Wage and National Minimum Wage is undoubtedly welcome news to those workers given a boost to their pay packets, on the other side of the coin, the cost of being an employer is soaring.

Increased wages also come with increased NICs and income tax contributions for employers, as well as a higher amount needing to be placed into auto enrolment pension schemes. This increasing financial burden could see some already distressed businesses being pushed to breaking point.

Here is what you need to know about paying the National Living Wage (NLW) or National Minimum Wage (NMW), and what you should do if you are unable to meet these costs.

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What is the difference between National Living Wage and National Minimum Wage?

Both represent the minimum level an employee must be paid; however, the difference in which one is applicable to any given individual comes down to their age. The NLW is applied to those aged 23 and above; NMW is given to anyone below 23. As of April 2024, the NLW is £11.44 an hour which is applicable to all workers aged 23 and over. Rates for NMW are slightly more complicated as they are tiered according to age. They are as follows:

How are pensions affected with National Living Wage?

As contributions to auto enrolment pension schemes are based on a percentage of qualifying earnings, any increase to an employee’s salary will likewise see you having to pay more towards their pension.

Minimum auto-enrolment pension contribution levels are 8% of qualifying earnings. While employees bear the brunt of this, having to contribute 5% of this amount, employers’ contributions make up the remaining 3%.

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Do I have to pay National Living or National Minimum Wage?

Quite simply – yes. These are the legal minimum rates you must pay to any employee regardless of the hours they work, length of service, or the duration of their contract. Failure to remunerate employees accordingly is against the law.

You should not confuse the National Living Wage with the ‘UK living wage’. This is a voluntary scheme set up by the Living Wage Foundation which encourages employers to pay their staff a higher rate of pay than current NLW levels. This is not compulsory, although several big-name employers have decided to adopt these recommended rates of pay.

What happens if I can’t pay National Living or National Minimum Wage?

It is a criminal offence not to pay employees either the National Minimum Wage, or the National Living Wage, depending on which scheme is applicable to them. Failure to adhere to your responsibilities when it comes to correctly remunerating employees can lead to you being handed a significant fine from HMRC once this is discovered. Not only would you be required to repay staff all the money they are owed, you will also face an additional financial penalty up to 200% of the amount you have been found to have underpaid.

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What should I do if I cannot afford to pay the National Living or National Minimum Wage?

If your company’s finances are stretched to the point that you can no longer continue paying your employees’ wages at the legal rate, you need to take swift action. An inability to pay wages is often an indicator of deeper financial concerns which need to be promptly addressed. You should contact an insolvency practitioner at the earliest possible opportunity and explain the financial issues your company is experiencing.

Consider potential financing options

In many cases it is a problem with cash flow which prevents a company from comfortably paying its staff what they are due. An insolvency practitioner will be able to consider your situation in more detail and advise the options available to you. You may be able to consider a form of invoice financing, including factoring and discounting, which may be able to ease your cash flow worries. Invoice financing works by giving you access to an agreed percentage of your unpaid invoices immediately upon you issuing them to customers. This can provide a much-needed level of certainty when planning your cash flow for the coming weeks and months, including staff wages. Although there is a fee associated with doing this, for some businesses the ability to plan ahead is worth the financial cost.

Formal insolvency procedures

If your company’s inability to comply with NLW and NMW regulations is caused by deeper rooted concerns, you may need to consider whether a formal liquidation procedure could be the most appropriate solution to your problems. There are a range of corporate insolvency procedures available; not all of these result in the closure of a company.

If you are struggling to pay your staff the National Living or National Minimum Wage, contact Real Business Rescue today. You can arrange a free no-obligation consultation with one of our licensed insolvency practitioners who will be able to assess your financial position and advise you on your next steps.