Confused about the National Living Wage? Here’s a breakdown

For employees above the age of 25, a compulsory National Living Wage (NLW) has been proposed at £7.20 per hour, to be implemented by 1st April 2016.

That’s a £910 increase annually for an employee working full time hours, and the rate is set to be increasing each year, raising to £9 an hour by 2020 (60% of median earnings).

Below we’ve broken down what this means for employees and employers.

What does this change?

At the moment, anyone above the age of 21 is on the same National Minimum Wage (NMW), and come April 1st under 25s will continue to receive the current NMW of £6.70 per hour.

Therefore, this decree is effectively adding another tier to the minimum amount employees must earn by law.

The NMW is reviewed annually by the LPC (Low Pay Commission) and a new rate is generally introduced on October 1st each year, depending on the employee’s age.

Most workers above school age are entitled to the NMW, but some are exempt from this law, for example self-employed individuals, and those who work on a voluntary basis.

You can find a more in-depth breakdown of the NMW rates on the GOV.UK website.

Hasn’t the Living Wage been around for a while?

Yes, you may have heard of the Living Wage (LW) before.

That’s because this figure is calculated annually by the Centre for Research in Social Policy at Loughborough University according to the basic cost of living, and set by the Living Wage Foundation.

However, this is a different figure to the proposed NLW, and is currently only used by employees voluntarily (London LW is £9.40, UK LW is £8.25).

Which steps do I need to take?

Now you are aware of the changes that need to be made, you must plan ahead to ensure that you are paying your employees enough and avoid HMRC (HM Revenue & Customs) arrears.

• Work out which of your employees are eligible for a pay rise. As a rule, those above 25 apply, but for a thorough explanation of who the new legislation will apply to, see GOV.UK’s employment status page.
• Once this has been established, the appropriate payroll action must be taken to update these employees’ hourly rate of pay.
• Your staff must then be made aware of the changes that are being made. Explaining how these changes are different from what they may have experienced in the past will put your employees at ease and ensure that there is no confusion.
• At this point, it is advisable to check that anyone under 25 that works for you is also earning the NMW of £6.70 per hour.

What will the consequences be if I neglect to take these steps?

And instance in which the NLW or NMW is not being payed to an eligible person, the staff member is first required to talk to their manager informally to ask for an increase to the necessary pay rate.

If the disagreement has not been resolved using this method, they are then able to make a formal grievance – a complaint to HMRC, who will then investigate the company.

Once they have established what is owed to the employee, HMRC will send a notice of arrears and add on a penalty for neglecting to pay the minimum wage required by law.