From 1st April 2022, National Living Wage (NLW) and National Minimum Wage (NMW) rates increased, with NLW rising by 6.6% to £9.50 per hour. HMRC is actively enquiring into NLW and NMW compliance, especially with the easing of the pandemic. Political pressure is likely to see this issue remain topical for some time, and a key area of HMRC focus.
There is often a misconception that compliance with the NMW regulations is as simple as paying the correct rate per hour. A further misconception is that employers paying above NMW do not need to concern themselves with the details of compliance with the NMW regulations as they are ‘safe’ due to the level of pay. These misconceptions expose employers to risk as there are a number of pitfalls that can catch out even the most conscientious employers and those who set out to pay their employees more than the legal minimums.
Some of the common pitfalls include:
- Identifying worker types and understanding the impact that this has on the NMW calculation. Even if annual pay is at or above NMW, breaches can sometimes take place in individual pay periods depending on employee working patterns.
- The definition of working time and capturing and paying for all working time at the appropriate time.
- Deductions from pay can cause NMW breaches, even where these are requested by an employee.
- Salary sacrifice can result in employees falling below NMW, unless specific controls are in place to prevent this.
- Uniform policy can create risks of breaching the NMW regulations.
HMRC NMW investigations are often kicked off when HMRC receive a compliant from an employee, which they are duty bound to investigate. With the current pressure on the cost of living, and political prominence of NMW issues, employees are more closely scrutinising their pay and working time, and this could lead to an increase in worker complaints to HMRC. HMRC also launches targeted investigations.
With penalties of up to 200% for any underpayments identified and reputational damage due to being named and shamed, there are significant costs to employers of breaching the NMW regulations. One piece of good news, however, is that if you identify and self-correct any errors prior to a HMRC review being launched, you can avoid these costs.
How can S&W help you manage these risks?
- We can carry out a risk review for you and highlight where you can improve your processes and policies and, if necessary, take corrective action prior to an HMRC review.
- Advise on your pay, benefits and other contractual arrangements with employees to ensure that you are compliant with the NMW regulations and best practice to minimise risk and streamline administration.
- We can support you with responding to HMRC queries and investigations.
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of writing.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. Clients should always seek appropriate tax advice before making decisions. HMRC Tax Year 2022/23.
This article was previously published on Smith & Williamson prior to the launch of Evelyn Partners.