Understanding the National Minimum Wage (NMW) and National Living Wage (NLW) is essential for both employers and employees, as they set the legal baseline for pay and have a direct impact on payroll, compliance, and business costs.
National Minimum Wage (NMW)
The NMW is the minimum hourly pay rate that almost all workers in the UK are legally entitled to. It applies to workers who are at least school leaving age, but under 21 years old, and also to apprentices. The specific rate varies depending on the worker’s age.
National Living Wage (NLW)
The NLW is a higher rate of minimum wage. It applies to workers aged 21 and over who are not in the first year of an apprenticeship. The NLW was introduced to ensure older workers receive a fair wage that reflects the cost of living. Previously, it applied to those aged 23 and over, but this was lowered to 21 and over from 1 April 2024.
For all intensive purposes on further mention NMW = NLW.
Important Points:
HMRC investigates complaints of underpayment and can take action against employers who do not comply. The rates for NMW are reviewed annually by the Low Pay Commission (LPC), an independent body that advises the government. New rates typically come into force on 1 April each year. The minimum wage is calculated on an hourly basis, even if the worker is not paid by the hour. This means that all elements of pay that count towards the minimum wage must be considered, and some deductions or payments (like tips) do not count. Apprentices have a specific minimum wage rate. However, if an apprentice is aged 19 or over and has completed the first year of their apprenticeship, they are entitled to the minimum wage for their age, which could be the National Living Wage if they are 21 or over.
https://www.gov.uk/national-minimum-wage-rates
https://www.gov.uk/employing-an-apprentice/pay-and-conditions-for-apprentices
https://www.gov.uk/government/organisations/low-pay-commission
How does this affect me/my business?
The most obvious impact is the increase in your direct wage bill for employees paid at or near the minimum wage. As the NMW rises, your weekly, fortnightly, or monthly payroll expenses will go up. This is particularly significant for businesses in labour-intensive sectors like retail, hospitality, and care services.
An increase in employee wages also means an increase in the Employer’s National Insurance Contributions you’ll have to pay. Xero will automatically calculate these based on the gross pay you enter. Recent changes (from April 2025) include an increased NI rate and a lower earnings threshold, which could further impact costs.
Common Pitfalls
Ensure your payroll settings are up to date and configured to reflect the latest NMW guidelines as XERO DOES NOT automatically apply NMW. Updating your Xero Pay rates in accordance with HMRC guidelines is Vital.
Employees can move into different NMW/NLW age bands (e.g., turning 18, 21) which means their minimum wage rate changes. Failing to update their rate in Xero upon their birthday can lead to issues so ensuring these records are kept up to date is crucial.
Understand the specific rules for apprentice pay. Ensure only eligible apprentices are on the apprentice rate, and that their rate is updated when they complete their first year or turn 19, whichever comes first.
Deducting costs for items like uniforms, tools, training, or expenses from an employee’s pay if it brings their effective hourly rate below the NMW. This also applies to salary sacrifice schemes if not properly managed. The only deduction that can bring pay below NMW is a limited amount for accommodation.
Be very clear on what deductions are allowed and ensure they do not reduce an employee’s pay below the NMW. Xero will process deductions you set up, but it’s your responsibility to ensure legality.
Failing to pay for all time an employee is at work and required to be available, including: Travel time between work sites,Waiting time (e.g., waiting for deliveries, meeting clients), Training time (even if off-site), Time spent on security checks, changing into protective clothing, or other mandatory activities before/after a shift.
Accurately track all working hours. Use Xero’s timesheet features or integrate with a time-tracking app to ensure all compensable hours are recorded and paid at the correct rate.
Understand the legal distinction between employees and self-employed contractors. Different rules apply to NMW calculations for different work types; ensure Xero’s payroll settings reflect the correct classification.
Consequences
HMRC actively investigates NMW non-compliance in businesses and penalties can be significant (up to 200% of the underpayment, with a maximum of £20,000 per worker, plus arrears).Regular reviews of your payroll data in Xero and adherence to the guidelines will help you avoid costly fines and reputational damage.
If you need help with this, or with other advice, then please get in touch with our accounting team.