Understanding the difference between the National Minimum Wage, the National Living Wage, and the Living Wage is imperative for any small business owner who has employees. The penalties for failing to pay employees correctly are substantial.

To help demystify the situation, we’ll take a look at the three main terms relating to wages and explain what they mean.

Figures have been updated to include the changes as of 1st April 2017.

 

What is the National Minimum Wage?

The National Minimum Wage (NMW) in the UK is dependent on your age and whether you’re an apprentice. It’s set annually by the Government, based on recommendations by an independent body known as the Low Pay Commission.

The NMW rates are due to change on 1st April 2017 as follows:

Age band Previous rate From April
Adult rate 25+  £7.20 £7.50
Adult rate 21 – 24 £6.95 £7.05
18 – 20 £5.55 £5.60
Under 18 £4.00 £4.05
Apprentice rate £3.40 £3.50

 

The NMW is applicable to every person over school leaving age, regardless of their position in the company. There are, however, a few exceptions where the NMW doesn’t apply, including:

  • Self-employed people running their own business
  • Company directors
  • Volunteers or voluntary workers
  • Family members of the employer living in the employer’s home

 

What is the National Living Wage?

The National Living Wage (NLW) was introduced in the Summer Budget 2015 by then-Chancellor George Osborne and became law on 1st April 2016.

The NLW means anyone over the age of 25 and not in the first year of an apprenticeship has to be paid £7.50 per hour or above. Confusingly, this is simply the NMW, but rebranded as the NLW. Don’t worry too much about the terminology. Instead, concentrate on the facts: you need to pay anyone you employ who is over 25 years of age and not a first-year apprentice at least £7.50 per hour.

Businesses that don’t pay the NLW to workers who are entitled to it could receive financial penalties and a disqualification from being a Company Director for up to 15 years.

 

What is the Living Wage?

Not to be confused with Osborne’s NLW, the Living Wage is an hourly rate based on the basic cost of living in the UK. It’s calculated by the Living Wage Foundation, a campaigning organisation in the UK, and therefore has no legal grounding. The Living Wage for the UK is calculated as £8.45 per hour and for London £9.75 per hour.

The NLW is a Government figure based upon average earnings, whereas the Living Wage is based on the actual cost of living.

Since it incorporates a range of salaries and earnings the NLW, it’s not surprising that the NLW is lower than the Living Wage. But many see the Living Wage as a more realistic expectation of how much a worker needs to earn in order to comply with the basics costs of living, such as rent, food, and utility bills.

According to the Living Wage Foundation, the main benefit of paying workers the Living Wage is that it can increase employee retention, decrease absenteeism, and enhance the quality of work produced.

 

Whether or not you decide to pay your employees the Living Wage, remember that failure to pay the NLW (aka the minimum wage) can land your business in hot water.

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