National Minimum Wage Increases: Avoiding Underpayments and HMRC Scrutiny

HMRC have released a list of companies who underpaid on National Minimum Wage (NMW) for the previous tax year. Often, this can be unintentional and occurs because of additional hours worked, unpaid travel and other expenses.

The new tax year begins on 6 April 2024, so businesses should ensure they are prepared for changes ahead of this date. This is particularly so because the NMW and National Living Wage (NLW) rates are increasing from 1 April 2024.

Liz Marker, from Westcotts’ Payroll Department, explains how to avoid ending up on the HMRC’s ‘name and shame’ list.

How NMW discrepancies can occur

There are plenty of innocent ways that NMW discrepancies can occur in businesses. Unfortunately, you do run the risk of breaching legislation and ending up on a public list released by HMRC if so. This could have a negative trickledown effect on your business. You may be less attractive to future applicants or seen as not running effective payroll management.

Some of the most common reasons that you would fail to pay an employee the National Minimum Wage are:

• Salary sacrifice – when an employer agrees to negate an employee’s gross salary for a non-cash benefit.
• Apprenticeships – there are different wage bandings for apprentices of a certain age and after a year of study.
• Work-related deductions – costs for DBS checks, uniforms, or other necessary requirements.
• Incorrect annualising – employers may calculate annual earnings by 40 hours x 52 weeks but there are not always 52 weeks exactly in a calendar year. This year, there are 52.143 weeks, or 52.286 in a leap year.

There are plenty of common pitfalls when it comes to calculating payroll correctly, and it is good for businesses to be familiar with them. This helps to avoid accidental underpayment and miscalculations in your accounting.

NMW bandings to increase

As of 1 April 2024, the NMW bandings are changing. The NLW will also be extended to workers aged 21 and over, previously 23 and over. Employers run the risk of underpaying workers, particularly salaried workers, if these changes are not adhered to.

Below is a table to show what the rates will be changing to as of 1 April 2024 in comparison to the current rate:

Real-Time Information Payment Submission

In the next tax year (2025-26), HMRC will also be gathering more information from the Real-Time Information (RTI) payment submission system. Currently, this system allows HMRC to see what employers have paid their employees. This also allows them to see tax and other deductions.

RTI submissions will be reporting more items of information to HMRC. Therefore, employers face a real risk if they’re not recording hours and paying staff properly. HMRC will look at each pay period on a standalone basis to establish if an employee has been paid in accordance with NMW legislation. They will not take into account if the employee had been paid over NMW hourly rates in the previous or the following pay period.

HMRC will be able to conduct checks to ensure all of the sums add up with this new information. If they find a discrepancy, you can expect a visit from them, or an inquiry opened. There can be harsh penalties for failing to pay your team the NMW or NLW rates.

Underpayments at a glance

Some of the underpayments on the HMRC’s list may seem like a huge sum. However, when you consider these distributed evenly among employees then the number becomes a lot smaller.

While the severity of underpaying employees should never be undermined, it can help to understand how these breaches sometimes occur unintentionally leaving business owners open to penalties.

If we say a business has underpaid its 2,500 workers by £40,000, that works out as an average £16 underpayment for each person. If this was across a two-year investigation, in a 24-month pay period, that’s only an average underpayment of around 67p a month.

Of course, this example is hypothetical. Not all employees are paid equally and, in some cases, businesses on HMRC’s list will have underpaid their employees purposefully. However, it can be helpful for business owners to understand that you can end up on the HMRC’s list for a variety of reasons.

How to prepare

With NMW rates going up from 1 April 2024, businesses are less than a month away from needing to make payroll adjustments. As well as this, employers will also need to start preparing for the new requirements for RTI payment submissions. Making sure you have everything in place will be crucial to avoiding penalties from HMRC.

At Westcotts, we understand that payroll can be both a technical and time-consuming process. We offer services to assist you with keeping your payroll management under control and offer expert knowledge.

For more information, please get in touch with Liz Marker or Jake Elms from our Payroll team today by calling 01752 666601 or emailing them.