National Minimum Wage & National Living Wage – changes ahead for 2025

Labour has stated its commitment to protecting the lowest earners in our society with its “Making Work Pay” strategy. On 30 July 2024, the Government delivered its remit to the Low Pay Commission (LPC) in relation to recommending a National Living Wage (NLW) rate applicable from April 2025.  

In its commitment to narrowing the gap between the National Minimum Wage (NMW) and the NLW, ensuring that every adult worker benefits from a genuine living wage, the remit includes: -

1. Setting the minimum wage at a rate based on the cost of living, ensuring it aligns with economic conditions.
2. Taking steps to narrow the gap between the NMW for younger workers (18–20-year-olds) and the NLW.
3. Continuing to consider the impact on business, competitiveness, and the wider economy.

In addition, the LPC has been asked to monitor and evaluate the NMW rate for under-18s and apprentices. 

Government recommend a rate, set as high as possible without damaging the employment prospects of each group, effective from April 2025. As the NMW rates for apprentices and under-18s were aligned to the same rate from April 2024, could we see the apprentice rate being phased out? It has been alluded to in previous LPC reports.

Setting pay rates based on a cost of living is not something unheard of – The “Real” Living Wage, a voluntary pay rate set by the Living Wage Foundation, is currently based on this method with two different rates payable for London-based employees (£13.85 per hour) and outside of London (£12 per hour). 

Back in April 2024, the LPC alluded to a projected NLW rate for 2025 in the region of £11.65 to £12.18, with a central projection of £11.89 – no doubt this will now change considering the revised remit delivered and employers could be facing yet another big hike in the minimum rates payable.

What does this mean for employers?

While higher wages can indeed benefit many, it does raise concerns that employers might prefer hiring more experienced workers if they have to pay the same rate to everyone aged 18 and over. This could potentially limit job opportunities for younger, less experienced workers.

Balancing fair wages with maintaining employment opportunities and managing business costs is a complex issue and many employers may still be managing the effects of the previous year’s high increases, such as:

• Increased costs to align NMW paid employees to the 2025 rates.
• Maintaining pay differentials across grades to attract and retain both new and existing employees.
• Financial and budget pressures when undertaking pay reviews.
• Additional employer National Insurance Contributions (NIC) costs and employer pension contribution costs.

What can businesses do?

National Minimum Wage compliance remains a focus of HM Revenue & Customs (HMRC) and will no doubt remain so as part of the new Labour Governments’ strategy on worker rights. Now is a good time to consider how any increase to the NMW rates will impact your business. Addressing any concerns in relation to historical and on-going compliance will help to avoid any repercussions of financial penalties and reputational damage from naming should HMRC choose to open a formal NMW audit and find any mistakes.  

The NMW/NLW rules are complex, yet HMRC does not show leniency in imposing penalties and naming referrals, even when mistakes are unintentional. Paying wages at the exact NMW/NLW rates leaves no room for error. We’ve encountered instances where salaried employees earning over £40,000 per year have breached NMW due to poorly implemented and managed salary sacrifice arrangements and excessive unpaid overtime.

Exploring alternative reward offerings can enhance remuneration packages, helping to retain loyal employees, maintain reward differentials to encourage progression, and attract new talent.  Some alternatives can also provide employer savings such as:

• Implementing pension salary sacrifice for both employee and employer NIC savings. However, it is crucial to ensure that this arrangement does not reduce an employee’s pay below their NMW entitlement.
• Offering other salary sacrifice arrangements that are attractive to employees, such as holiday buy, EV (Electric Vehicle) etc but being mindful of NMW compliance when offering these to employees.
• Reclaiming NIC paid on car allowances (where reimbursement of mileage claimed for use of own car is less than 45p per mile).
• Considering broader bonus, holiday and pension strategy.
• Utilising share schemes and equity incentives (where relevant).

Other arrangements to consider in helping to create reward differentials include (but not exhaustive): 

• Discount schemes for shopping, restaurants etc.
• Tiers of holiday and pension contribution depending on seniority and years service, or other factors.
• Utilising hybrid working and paying up to £26 per month tax/NIC home working allowance.

In summary, wherever the new rates may land, there will be continued challenges ahead and whilst we eagerly await the Autumn Budget to find out to what extent they may be, businesses may wish to start considering (if not already) what measures or initiatives they can implement to increase employee reward offerings to not only go towards mitigating rising employee costs but to retain loyal employees and attract new talent whilst maintaining profit margins. 

Our Employment Tax team have a wealth of experience in reward offerings and National Minimum Wage expertise. They are used to having many client conversations in relation to National Minimum Wage compliance, reward and benefit offerings as well as looking at cost-saving initiatives, such as implementing pension salary sacrifice. 

If you would like to discuss any matters related to employment tax services please do get in touch. 

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In the meantime, if you have any concerns about NMW compliance please complete our NMW Assessor Tool and receive your free, no-obligation high-level risk report that highlights any areas that may warrant further investigation