February 23, 2016

Our easy guide to the National Living Wage

Are you concerned about how the national living wage will affect your business this April?

Do you know what the impact would be on your business when a full time worker aged 25 or over who is currently on the National Minimum Wage will be paid an extra £4,800 per year by 2020?

Don’t worry, we have got you covered with our easy guide to the national living wage…

What is the National Living Wage?

The National Living Wage will be set at £7.20 per hour for employees aged 25 or over.

For those currently on the National Minimum Wage of £6.70, this is an increase of 50p per hour, which is a 9% increase.

This new rate of pay will apply to all employees, workers, agency workers and apprentices who are 25 years of age or above.  But that’s not all.  The target is to have a rate of at least £9.00 by 2020.  This is an increase of 45p per hour each year.

In real terms, this means that each full time worker aged 25 or over who is currently being paid the National Minimum Wage of £6.70 per hour will earn over £4,800 more by 2020.

It is estimated that around 2.7 million workers will benefit from the increased rate of pay.  If the current pay differentials remain this figure increases to more than 3 million.

Are there any exemptions?

Yes – apprentices in their first year of apprenticeship, even if they are 25 or over.Those who are self-employed, volunteers, the armed forces, au pairs, share fishermen and prisoners.

Is it the same as the Living Wage?

No.  The National Living Wage is mandatory for everyone age 25 and over.  The Living Wage is voluntary and companies are accredited by the Living Wage Foundation.  The current rate for over 18’s is a minimum of £8.25 per hour, so much higher than the National Living Wage.

What’s happened to the National Minimum Wage?

The National Minimum Wage is still in place with the current rates being: apprentice rate of £3.30 per hour; £3.87 per hour for 16 to 17 year olds; £5.30 for ages 18 to 20; and the adult rate of £6.70 now being for those aged 21 to 24.  The new National Living Wage then adds to this – £7.20 for those aged 25 and over.

What happens if you don’t pay the correct rate?

The legislation will be enforced by HMRC and non-payment will result in a fine. Currently the fine is 100% of the amount due.  However, in April this fine increases to 200%; this may be halved if paid within 14 days.

HMRC are setting up a new team to pursue criminal prosecutions for employers who deliberately do not pay workers the wage they are due.

Failure to pay after being issued with an enforcement order will result in a fine of up to £200,000 per person, the same as for non-payment of the National Minimum Wage.  In addition, those responsible for the non-payment are likely to be banned from being a company director for up to 15 years.

Industries Most Affected by the Introduction of the National Living Wage

It is estimated that around 75% of those who work in retail, the care industry and the hospitality industry will be affected by the introduction of the National Living Wage.

From 1st April, it is very likely that these workers will be now be on the same pay rate as their supervisor or line manager.  Clearly, this will have an impact on the other levels of staff too.

These supervisors and managers are currently being paid a premium for the responsibility they have for managing the other employees.  It is unlikely that they will be happy continuing to do so if those they are supervising or managing or being paid the same hourly rate, so the knock-on effect could be even more costly.

This is an area where employers will need to look closely at their costs and budgets for the next few years.  It may mean that you look at processes to make you more efficient; you may decide to maximise employee attrition by not recruiting if someone leaves, you may look at reducing the workforce, or put a ban on recruitment.

When checking for eligibility for the new rates, don’t forget to check those members of your workforce who are currently under 25.  When will the new rate affect them?

Beware of Age Discrimination

Although you won’t fall foul of the legislation around Age Discrimination for paying the different rates of pay for different age groups, you need to be careful if recruiting.

If you have two candidates with similar experience and qualifications, one who is age 21 and the other age 25, you will need to be able to justify why you offered the job to the 21 year old rather than the 25 year old.

If it’s purely for the fact that the 25 year old will need to be paid the National Living Wage of £7.20 per hour but you could pay the other candidate £6.70 per hour, then this could result in a claim for age discrimination from the 25 year old.

The same could be said if making redundancies.  Remember it is automatically unfair to dismiss someone for reaching the age for the National Living Wage, however it is packaged!

If  you need help or advice on this subject, contact us. You can keep up to date with all the latest changes in legislation with our handy Employment Law Guide and Payroll Legislation Guide.

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About the author

Elaine Pritchard

Elaine has a wealth of knowledge in producing contracts, training materials and other documentation as well as training other consultants. She piloted a scheme whereby she went on-site to act as a client’s HR Manager two days per week, whilst the post-holder was on maternity leave. Elaine also previously ran her own retail business for seven years, employing four people. Elaine is a field based consultant for Moorepay and provides on-site HR and Employment Law advice, consultancy and training services to our clients.