National Minimum Wage
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There are five rates of National Minimum Wage (as of 1 April 2021):
- for workers 25 and over – The National Living Wage – £8.91 per hour
- for workers aged 21-24 - £8.36 per hour
- for workers aged between 18-20 - £6.56 per hour
- for workers under 18 - £4.62 per hour
- for apprentices - £4.30 per hour.
Is this relevant to me?
The National Minimum Wage came into effect on 1 April 1999. It is relevant to all businesses that have employees, regardless of the size of the business. The National Minimum Wage is enforceable by HM Revenue and Customs (HMRC).
If HMRC finds that you have underpaid any of your staff, they can issue a Notice of Underpayment requiring you to repay arrears to your staff (paid at the current minimum wage rate) and pay a penalty to the Government. The penalty is 200% of the total underpayment, with a maximum of £20,000 per worker.
Who is entitled to the National Minimum Wage?
Anyone working for you (including part-time and casual staff) is entitled to receive the National Minimum Wage except:
- anyone 'genuinely self-employed' (e.g. someone who controls their own time, what work they do, and invoices you rather than receiving wages)
- voluntary workers
- workers who are based permanently outside the UK or who are based in the Channel Islands or the Isle of Man.
What is the National Minimum Wage?
There are five rates of the National Minimum Wage. Rates as of 1 April 2021 are:
- £8.91 per hour for employees aged 25 and over (National Living Wage)
- £8.36 per hour for employees aged 21 -24
- £6.56 per hour for employees aged 18-20
- £4.62 per hour for employees aged under 18
- £4.30 per hour for apprentices aged under 19 or those in the first year of their apprenticeship.
Further information on the National Minimum Wage, including current rates, can be found on the National Minimum Wage and National Living Wage pages on the Gov.uk website.
What counts as part of a wage?
Included: in addition to basic pay, certain other payments may count towards the National Minimum Wage, including:
- money for items such as clothing and shoes, where the worker can decide where to buy the items.
Excluded: other additional payments are excluded, including:
- premium payments for overtime of shift work
- special allowances
- tips, service charges or any other type of gratuity (see Tips and service charges below)
- expenditure on items such as clothing and tools related to work
- all benefits in kind, including meals, except accommodation. Benefits in kind do not count towards minimum wage pay, even if they have a monetary value. However, there are special rules where you provide a worker with accommodation.
If you provide accommodation to a member of staff, you are entitled to offset an amount for this against the National Minimum Wage. If the accommodation is provided free of charge, the daily accommodation offset rate is £8.36 and the weekly offset rate is £58.52 from 1 April 2021. For more details see the National Minimum Wage and Living Wage: Accommodation pages on the Gov.uk website.
Does the National Minimum Wage apply to rest breaks, sick time and holidays?
There are four main types of work and each can apply in the accommodation sector:
- time work: when you pay the worker according to the number of hours he/she works
- salaried hours work: when the workers have a contract to work a set number of basic ascertainable hours each year in return for an annual salary paid in instalments
- output: paid by the piece - the number of things they make, or tasks they complete
- unmeasured: paid in other ways.
The different types of work give rise to varied ways of determining entitlements. For more information, go to the minimum wage for different types of work pages on the Gov.uk website.
Regardless of the contract type, the determination of work hours does not include rest breaks, sick time, or holidays.
What is the National Living Wage and how does it affect me?
The National Living Wage does not replace the National Minimum Wage. Rather, it is a premium to be paid on top of the National Minimum Wage to employees aged 25 and over in order for those employees to receive an income that is 60% of median earnings by 2020.
When it was introduced on 1 April 2016, the National Living Wage increased the minimum wage that must be paid to employees aged 25 and over. From April 2021, the rate is £8.91 per hour. Those employees aged between 21 and 24 are not eligible for the premium and therefore remain on £8.35 per hour, while the other three National Minimum Wage rates (for those aged 18-20, under 18 and apprentices aged under 19) are unaffected by the National Living Wage.
As with the National Minimum Wage, the National Living Wage premium is set annually by the independent Low Pay Commission. Both rates will apply from 1 April each year.
Further information on the National Living Wage is available on the National Minimum Wage and National Living Wage pages on the Gov.uk website.
Tips and service charges
You are not allowed to use tips and service charges to form part of the National Minimum Wage. This means that employees must receive at least the National Minimum Wage as base pay, with any income from tips or service charges being additional. This is regardless of whether the gratuity is paid directly by the customer to the employee (e.g. a cash tip left on the table in a restaurant) or through the payroll (e.g. a discretionary service charge added to the customer’s bill).
The Department for Business, Energy and Industrial Strategy (BEIS) has produced a code of practice for the treatment of tips and service charges by businesses: A Code of Best Practice on Service Charges, Tips, Gratuities and Cover Charges. This code has been endorsed by UKHospitality, the Trade Union Congress and the Confederation of British Industry (CBI) and is based on four principles:
- That businesses clearly display their policy on tips and service charges for customers.
- That businesses have a process in place for explaining to customers how charges are distributed and what, if any, deductions are made.
- That businesses should ensure that staff understand the policy and are able to explain it to customers.
- That staff are fully informed of the distribution of tips and service charges and any deductions and are consulted on any changes.
Note: the Employment (Allocation of Tips) Bill 2019-20 was announced in the Queen’s Speech on 14 October 2019 with the aim of ensuring that all tips must go to the staff providing the service, but at time of publication the Bill has not yet gained Parliamentary time due to the COVID-19 outbreak.
How should cash tips be dealt with?
Cash tips are payments given directly by customers to individual employees, not to the business. Any arrangement for sharing cash tips among employees should be in accordance with their wishes. The business owner will not be involved in this process. It is the responsibility of the employees receiving such cash tips to make proper disclosure to HM Revenue and Customs and to account for Income Tax in respect of these earnings.
How should service charges be dealt with?
For gratuities, such as service charges that are incorporated into the billing system, the business can deduct costs incurred in handling and distributing these payments to employees. Such deductions would cover credit card and banking charges, payroll processing costs, and the average costs of credit card fraud.
Businesses are also able to make deductions associated with other costs including breakages, till shortages and customers leaving without paying. While the level of these costs will vary depending on the nature of the business, the Department for Business, Energy and Industrial Strategy guidance suggests that total deductions should not be more than 30% of gratuities received.
These deductions should be revealed to customers as part of the disclosure process.
Where discretionary service charges and non-cash tips are paid to employees by the business, they should be paid from the company bank account, with Income Tax deducted under PAYE. The broad process for distribution of these amounts should be revealed to customers as part of the disclosure process (see below).
What disclosure should be made?
Businesses should disclose to customers how they deal with service charges and non-cash tips, at least by a written note available for inspection at each restaurant and on the company website, if there is one. The disclosure should cover:
- whether an amount is deducted for handling costs (and how much)
- how the remainder is shared between the business and the employees
- the broad process for distribution, e.g. that they are shared between the employees in the business through a system controlled by a representative of the employees.
- You are required to keep sufficient records to prove you are paying the National Minimum Wage.
- You must allow workers to see their record within 14 days if they make a request in writing.
National Minimum Wage
The ACAS helpline on 0300 123 1100 gives free advice on National Minimum Wage issues. You can also visit Gov.uk for more information.
Calculate your minimum wage
The Department for Business, Energy & Industrial Strategy has recently published guidance on calculating the minimum wage to help employers.
Download 'The Code of Best Practice on Service Charges, Tips, Gratuities and Cover Charges' from www.gov.uk
Become a Living Wage employer
The Living Wage Foundation accredits businesses who pay direct employees the ‘real Living Wage’.
Further guidance on being an employer
Find key resources to help you recruit and manage employees on our dedicated page.