Understanding the difference between the National Minimum Wage, the National Living Wage, and the Living Wage is important 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 these three main terms relating to wages and explain what they mean:
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 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.
The NMW rates are as follows:
||From 1st April 2019
||From 1st April 2020
|Adult rate 25+
|Adult rate 21 – 24
|18 – 20
|Apprentice rate 1
1 The NMW for apprentices applies to all those aged under 19 employed on a Contract of Apprenticeship, and apprentices aged 19 or over in the first year of their Apprenticeship. It must be paid for all the time the apprentice spends working and all their time spent training. After this, the apprentice must be paid the normal NMW for their age.
The government has set a target for the NLW to reach two-thirds of median earnings and be extended to workers aged 21 and over by 2024, provided economic conditions allow. Based on the latest OBR forecast, this means the NLW is expected to be over £10.50 in 2024.
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.
Confusingly, the NLW was simply a renaming of the NMW and not truly linked to the cost of living. The NLW is currently set at the same level as the NMW and means anyone over the age of 25, and not in the first year of an apprenticeship, has to be paid £8.72 per hour or above (2019/20 figure was £8.21).
Regardless of the terminology, the fact is that you need to pay anyone you employ, who’s over 25 years of age and not a first-year apprentice, at least £8.72 per hour from 1st April 2020.
What is the Living Wage?
Not to be confused with the NLW introduced under the Conservatives (see above), the Living Wage, sometimes referred to as the ‘Real’ 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 set at a recommended £9.30 per hour and for London at a recommended £10.75 per hour (these are figures published for the 2019/20 tax year).
The NLW is calculated by the Government based on a proportion of the median level of earnings, whereas the Living Wage is calculated independently of Government and is based on the amount people actually need to get by.
Since the NLW is based on a proportion of earnings (the Government has a target to achieve two-thirds of median earnings by 2024) it’s not surprising that the NLW is lower than the Living Wage. But many see the Living Wage as a more realistic calculation of how much a worker needs to earn in order to meet the basic cost 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.
Non-payment of the NMW, NLW, or Living Wage
It is against the law for employers to pay workers less than the NMW or NLW, or to falsify payment records. The maximum fine for non-payment is £20,000 per worker. However, employers who fail to pay can be banned from being a company director for up to 15 years.
Whether or not you decide to pay your employees at least the Living Wage, remember that failure to pay the legally required amount can land your business in hot water.
If you’re a Crunch client and you employ people through your business, ask us about our Payroll service.