Getting National Minimum Wage (NMW) wrong is one of the most common and costly compliance failures for UK employers. HMRC actively investigates underpayment, and the penalties are severe. The good news is that with proper awareness and regular payroll checks, staying compliant is straightforward.
This guide covers the current rates, the mistakes we see most often, the penalties you face if you get it wrong, and how to audit your own payroll.
Current NMW and NLW rates from April 2025
The National Living Wage (NLW) and National Minimum Wage rates increased on 1 April 2025. The current rates are:
- 21 and over (National Living Wage): £12.21 per hour
- 18 to 20: £10.00 per hour
- Under 18: £7.55 per hour
- Apprentice rate: £7.55 per hour
The apprentice rate applies to apprentices aged under 19, or apprentices aged 19 and over who are in their first year of apprenticeship. After their first year, apprentices aged 19 or over must be paid at least the rate for their age group.
One detail that catches employers out: the NLW age threshold dropped from 23 to 21 in April 2024. If you still have pay bands based on the old threshold, check that all employees aged 21 and over are receiving at least £12.21 per hour.
Common compliance mistakes
Most employers who fall foul of NMW rules do not set out to underpay their staff. The problems usually arise from payroll practices that inadvertently push effective hourly pay below the minimum.
Salary sacrifice schemes
Salary sacrifice arrangements for pensions, cycle-to-work schemes, or childcare vouchers reduce the employee's gross pay. If the reduction brings their effective hourly rate below the NMW, the arrangement is non-compliant. You must check that every employee on a salary sacrifice scheme still earns at least the minimum wage after the sacrifice is applied.
Unpaid working time
If employees regularly work beyond their contracted hours without additional pay, their effective hourly rate drops. This includes time spent opening up before a shift, cashing up after closing, mandatory training outside normal hours, or travelling between work sites during the working day. All of this counts as working time and must be factored into the NMW calculation.
Uniform and equipment costs
If you require employees to purchase a uniform, tools, or equipment for work, and the cost brings their pay below the NMW in any pay reference period, you are in breach. Providing uniforms and equipment free of charge is the safest approach for roles close to the minimum wage.
Deductions from wages
Any deductions for things like till shortages, breakages, or accommodation charges can reduce pay below the NMW. Accommodation is the only benefit-in-kind that counts towards NMW pay, and there is a maximum offset rate (£10.66 per day or £74.62 per week from April 2025). All other deductions must not bring pay below the minimum.
Misclassifying workers as volunteers or interns
Unpaid internships are lawful only if the individual is genuinely not a worker, for example if they are on a recognised educational placement or simply work-shadowing with no obligation to perform tasks. If your "intern" has set hours, performs productive work, and is expected to turn up, they are almost certainly a worker entitled to NMW.
Incorrect age band application
When an employee moves from one age band to another (for example, turning 21), their pay rate must increase from the start of the next pay reference period. Missing this is a common administrative error, especially in businesses with high numbers of younger workers.
Penalties for non-compliance
HMRC takes NMW enforcement seriously, and the consequences go beyond simply repaying the shortfall.
Financial penalties. Employers who underpay face a penalty of up to 200% of the total underpayment, with a minimum of £100 per worker and a maximum of £20,000 per worker.
Naming and shaming. The government operates a public naming scheme for employers who breach NMW rules. Businesses that owe more than £500 in arrears to workers can be publicly named.
Criminal prosecution. In the most serious cases, deliberately refusing to pay the NMW or falsifying records can lead to criminal prosecution. Convictions carry unlimited fines.
Employee claims. Workers can also bring their own claims for unlawful deduction of wages through an employment tribunal, which adds further cost and management time.
How to audit your payroll
A regular NMW audit is the best way to catch problems before HMRC does.
Identify employees at risk. Start with any employees whose basic pay is within 10% of the NMW for their age band. Also check employees on salary sacrifice schemes, zero-hours contracts, and piece-rate or commission-based pay.
Calculate the true hourly rate. Divide total NMW pay in the pay reference period by total hours worked. NMW pay includes basic salary but excludes tips, premium payments for overtime or shift work, and most benefits-in-kind. Total hours must include all working time, not just contracted hours.
Check deductions and costs. Review any deductions made from wages, including salary sacrifice amounts, uniform costs, and accommodation offsets. If any deduction brings pay below the NMW, it must be adjusted or removed.
Verify age band transitions. Cross-reference employee dates of birth against your payroll records to confirm that rate increases have been applied when employees move into a higher age band.
Review records. HMRC can request payroll records going back six years. Make sure you are keeping accurate records of hours worked, pay rates, and any deductions.
What is changing
The Employment Rights Act 2025 introduces several changes relevant to pay compliance. The new Fair Work Agency, launching in April 2026, will consolidate enforcement of NMW alongside holiday pay and SSP obligations. This means a single body with broader powers investigating pay compliance.
The National Living Wage is also rising to £12.71 from April 2026, with the 18 to 20 rate increasing to £10.85. If your pay structures are already tight against the current rates, plan ahead now.
Practical steps for employers
- Run a payroll audit at least annually, and always after a rate change in April.
- Review salary sacrifice schemes to ensure no employee drops below the minimum.
- Track all working time accurately, including pre-shift and post-shift duties.
- Provide uniforms and equipment free of charge where roles are close to the minimum wage.
- Update your employment contracts to reflect current pay rates and any changes to hours or deductions.
- Check your HR policies cover pay review procedures and record-keeping requirements.
- Set calendar reminders for April rate changes and employee age band transitions.
How Rebox HR can help
NMW compliance is not something you want to leave to chance. If you are unsure whether your payroll practices stand up to scrutiny, or if you need help auditing your pay structures, we can help.
Our retained HR support clients receive ongoing guidance on compliance issues including NMW, ensuring problems are caught and resolved before they escalate. If you need a one-off review, our HR health check service includes a thorough examination of your pay practices and employment documentation.
Book a free consultation to discuss your requirements, or call us on 01327 640070.
