Effective April 1, both the National Minimum Wage (NMW) and National Living Wage (NLW) will increase, as announced by the Chancellor in her Budget last autumn. Specifically, the NMW for those aged 18-20 will rise to £10 per hour, while the NLW for workers aged 21 and over will reach £12.21 per hour.
These wage increases reflect the government’s commitment to supporting workers amid the rising cost of living. However, they also present challenges for employers, particularly in ensuring payroll compliance.
Understanding the Budget Implications
The upcoming NMW and NLW rate changes will significantly impact businesses’ largest expense—wages. Many employers are closely analyzing their finances to accommodate these adjustments. Additionally, an increase in National Insurance Contributions further emphasizes the need for adaptability in budgeting.
To navigate these changes, businesses may need to review their pricing strategies to offset increased costs. This might involve raising prices for customers or implementing cost-cutting measures, including reducing benefits or working hours.
Updating Payroll Systems and Frameworks
The first step businesses must take to prepare for the new NMW and NLW is to update their payroll systems to reflect the revised rates. Employers should also ensure that employee information—such as personal details and bank account data—is current and free from errors. Accurate records are essential for efficient payroll processing.
Conducting a payroll audit before April 1 will help identify and correct any errors or inefficiencies. This proactive approach ensures a smooth transition to the new rates without unnecessary delays.
Considering these new pay rates will also necessitate a review of existing pay frameworks. The constant increase in NMW and NLW has created challenges in differentiating pay bands. To ensure equity and transparency, business leaders should revise their pay structures accordingly.
Managing Salary Sacrifices and Deductions
Businesses offering salary sacrifice schemes must exercise caution with the new NMW and NLW, as deductions—whether voluntary or not—could inadvertently reduce employees’ pay below the legal minimum. Employers bear the responsibility for ensuring compliance with wage regulations. Therefore, meticulous planning ahead of April 1 is crucial.
Ensuring Compliance with Payroll Regulations
With over 170 pieces of legislation affecting payroll, achieving compliance can be challenging. Mistakes, even unintentional ones, may result in severe penalties, ranging from significant fines to criminal prosecution. As the government intensifies its scrutiny of NMW compliance through the forthcoming Fair Work Agency, which will take over the role of HMRC’s NMW unit in the 2026-27 financial year, meticulous attention to detail is more important than ever.
Employers must carefully review their adherence to laws such as PAYE tax codes, NLW regulations, the National Minimum Wage Act 1998, and the Income Tax (Earnings and Pensions) Act 2003.
The Consequences of Being Unprepared
Neglecting to prepare payroll for the NMW and NLW increases could lead to substantial financial penalties. Employers violating wage regulations can face fines of up to 200% of owed arrears, with a maximum penalty of £20,000 per worker. However, employers can reduce penalties by 50% if they settle unpaid wages within 14 days.
Moreover, payroll errors can adversely affect employee morale and engagement. For instance, a single late payment can disrupt employees’ financial stability, leading to significant dissatisfaction. Research indicates that nearly 49% of employees would consider leaving a job after experiencing just two payroll errors.
While payroll may not always be the most glamorous aspect of business operations, it plays a critical role in driving employee morale, productivity, and compliance—all essential for a strong business reputation and financial integrity.
Streamlining Payroll Through Outsourcing
To simplify the payroll process, companies may want to consider outsourcing to experts who are well-versed in the latest changes. Outsourcing payroll alleviates the challenges of managing payslips, pension schemes, and employee costs while ensuring compliance with NMW and NLW updates.
For more information about our services at Duncan & Toplis, visit www.duncantoplis.co.uk.
By Damon Tunnicliffe, Head of Payroll, Duncan & Toplis
