The National Minimum Wage and The National Living Wage

26 December 2015

26 December 2015 by MHA MacIntyre Hudson

What is the difference?

The National Minimum Wage (NMW) was introduced by the labour government in 1999 in order to encourage low paid workers to move back into employment. It was also hoped that it would protect some groups from exploitation and lift people out of poverty.  The NMW rates are the minimum amount per hour that most workers in the UK are entitled to be paid.

The National Living Wage (NLW) will be introduced in April 2016 and it will be mandatory for employers to pay at least this rate to all workers aged 25 and over. This is an essential part of the government’s aim to move to a higher wage, lower tax and lower welfare society. Rather confusingly, the NLW is not simply a new category of NMW but is instead an additional premium only available to those aged 25 or over. It also has nothing to do with the Living Wage Foundation which currently (October 2015) recommends a UK wide rate of £7.85 and London rate of £9.15/hour.

 

Different categories of NMW and where does NLW fit in?

When the NMW was introduced back in 1999 we had an adult rate of minimum wage for workers aged 22 or over and the system got more complicated over the years introducing a rate for workers aged 16-17 in 2014 and a rate for apprentices in 2010.

The government takes recommendation about the rates from the independent Low Pay Commission (LPC) and changes are made annually on 1 October. The current rates are:

  21 and over 18-20 Under 18 Apprentice* Accommodation offset**
NMW £6.70 £5.30 £3.87 £3.30 £5.35/day

*The apprentice rate applies to apprentices under 19 or above 19 and in their first year of apprenticeship; when they complete their first year, the appropriate NMW rate for their age will apply.

**If the employer provides the worker with accommodation, some of the costs of the accommodation can be counted towards the NMW and this is called “accommodation offset”; the employer cannot count more that the accommodation offset towards the NMW.

The National Living Wage (NLW) applies to workers aged 25 or over but it is not simply a new level of NMW but only a premium paid on top of the NMW for these workers. The government set the first premium in April 2016 at 50p bringing the total NLW to £7.20 (NMW £6.70 + 50p premium). The government has set out an ambition that this should continue to increase to reach £9 by 2020 - towards the aim of reaching 60% of median earnings. LPC is being asked to provide indicative rates for 2017 and 2018 and these are expected to be published in October 2016.

 

What can happen if the company doesn’t comply?

The NMW rules are enforced by HMRC and the government is planning to introduce tougher penalties for non-compliant companies from April 2016. Penalties for non-payment will be doubled, from 100% of arrears owed to 200%, although these will be halved if paid within 14 days. The maximum penalty will remain £20,000 per worker.

In addition to this, HMRC as the enforcer also has the power to “name and shame” the offenders. Since the scheme was introduced in October 2013, 398 employers have been named and shamed, with total arrears of over £1,179,000 and total penalties of over £511,000 (figures from October 2015).

 

The expected impact of NLW

The introduction of the National Living Wage in 2016 is expected to result in about 60,000 job loses. This prediction from the Office of Budget Responsibility (OBR) comes as many business groups are already warning that the changes will badly affect them.

 

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