Minimum wage calculations – simple or not?

The National Minimum Wage (NMW) and the National Living Wage (NLW) are set annually.

In the 2016 Budget it was announced that the new rates for NMW and  NLW will come into effect 1 April 2017. The rates are clear-cut, relevant nationwide and enforced by HMRC. However, how the rates are calculated is not so simple.

Rates

The rates for 2017-18 are

  • For workers aged 25 years and over (the NLW) is £7.50 (from £7.20)
  • For workers aged from 21 to 24 years is £7.05 (from £6.95)
  • For workers aged from 18 to 20 years is £5.60 (from £5.55)
  • The 16–17 rate for workers above school leaving age but under 18 is £4.05 (from £4.00), and
  • The apprentice rate, for apprentices under 19 and for apprentices aged 19 or over and in the first year of their apprenticeship, is £3.50 (from £3.40)
  • The weekly and equivalent daily rate of the accommodation offset increased to £44.80 (from £42.00) and £6.40 (from £6.00), respectively

The apprentice rate does not apply to the Higher Apprenticeships, but the first year apprentice rate can apply to an apprentice regardless of age. This can result in the rather anomalous situation of a 45 year old worker being paid £3.50 an hour.

When calculating the current rate be aware that it is the interaction between minimum wage, salary sacrifice, accommodation and accommodation offset that can cause the complexities.

Salary sacrifice and optional remuneration arrangements

Any salary sacrifice arrangements and similar arrangements must be reviewed so that a worker’s pay is not taken below the NMW or MLW. This may mean that low-paid workers may unfortunately be excluded from any such schemes.

Accommodation

Employer provided accommodation is another area where minimum rates can unknowingly be breached; whether the accommodation counts towards the NMW or NLW, and whether the accommodation offset applies.

Employer provided accommodation

This is defined as:

  • Accommodation that comes with the job
  • Property that the employer, or a connected entity, owns or rents (even if the accommodation is unrelated to the job), to the worker
  • Accommodation for which the employer receives payment from the worker’s landlord or member of the landlord’s family

Under these circumstances the accommodation costs are considered as part of the minimum wage even if the accommodation is not used.

However, if the accommodation is optional and not used by the worker, then it does not count as part of the minimum wage.

Accommodation offset

There has recently been press commentary on various cases involving the accommodation offset. That is not surprising as the accommodation offset can be complex depending on the circumstances. The rules, in their simplest form, are

  • If the accommodation is free then there is an offset charge of £6.40 per day
  • If an accommodation charge is at or below the offset rate of £6.40 per day then this has no effect on the worker’s pay
  • If an accommodation charge is above the offset rate of £6.40 then the excess will be counted as part of the minimum wage

These rules are of particular interest to those who work in the care or probation sectors or other similar sectors and it would be worth checking that the paid rates are compliant with the NMW and NLW rules. Examples of the NMW and NLW and accommodation offset can be found here.

As can be seen from above, there are several pitfalls when calculating the minimum wage as it is dependent on age, apprenticeship level, what is included in the payment or how much pay is sacrificed. Listed below are a few areas that warrant careful note.

  • A first-year apprentice, regardless of age may be paid a minimum of £3.50 per hour.
  • Salary sacrifice could take the pay below the minimum rates and the employer deemed as non-compliant.
  • Accommodation could be included in the minimum wage calculation, even if there is no connection between the accommodation and the work.
  • Optional accommodation if not used is not considered a part of the minimum wage.
  • The amount the accommodation is offset is dependent on whether the amount charged is nil, below the offset amount or above the offset amount.

So what can be done to minimise non-compliance and possible fines?

  • Review the client’s payroll every month and check that the rate paid is the minimum for their age and status.
  • Write to the client before the rate change and when pay reviews are being discussed to remind them of the statutory minimum.
  • Factor in the salary and National Insurance contributions into any financial budgets for the coming year.
  • Keep up to date with all the recent court rulings and update the client accordingly.

Julie Hodgskin is a fellow member of AAT, runs a licensed accounting practice and is a technical materials author for CIPP.

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