The government are continuing their commitment to making sure employees in the UK receive a fair pay deal, and the national minimum wage (NMW) sets a level below which pay cannot fall. This ensures protection for low-paid workers while also providing incentives to work.
A further step has now been taken to address the issue of low pay and come 6 April 2016 the new mandatory national living wage (NLW) will come into force, applying to workers aged 25 years and over.
So employers are faced with another layer of complexity for payroll processes, with two pay increases to implement within the next few months; the NMW from 1 October and then the NLW from 6 April. However, the government is conscious of the additional administration burden so there is the possibility of an alignment on the horizon.
National minimum wage
There are currently four NMW rates, which change annually for all workers on an October cycle: the adult rate (for those aged 21 and over), the 16-17-year-old rate, the youth development rate (for those aged 18-20) and the apprentice rate. The rates from 1 October 2015 are:
- Adult rate £6.70 per hour
- 18 to 20 year olds £5.30 per hour
- 16 to 17 year olds £3.87 per hour
- Apprentice rate £3.30 per hour
- Accommodation offset £5.35 per hour (£37.45 per week).
The national living wage
From 6 April 2016 the new NLW for workers aged 25 and above will be introduced by an initial 50 pence living wage premium on top of the NMW. The rate will start at £7.20 an hour and when in force only 21-24 year olds will be paid at the adult rate of the NMW. The government has set out an ambition that the NLW should continue to increase each April to reach 60 per cent of median earnings by 2020, with an objective to be over £9 an hour by 2020.
The office for budget responsibility (OBR) has indicated that knock-on effects further up the wage distribution chain could mean a further 3.25 million people also see an increase in wages as a result of the NLW. By the end of this parliament, an individual aged over 25 working 35 hours a week and previously earning the NMW will see their gross wages increase by around a third compared to 2015-16, or £5,200 in cash terms.
This is great news for workers, however the government has stated that it recognises the new NLW may increase costs for some businesses. Therefore on top of other reductions in business tax, from April 2016 the national insurance contributions employment allowance will increase from £2,000 to £3,000 a year.
The living wage
The ‘living wage’ must get a mention as it is not to be confused with the new NLW – the differences are fundamental. The living wage is set by The Living Wage Foundation (founded in 2001), and they offer accreditation to employers that choose to pay the living wage on a voluntary basis. It is a benchmark rate, calculated according to the basic cost of living in the UK, whereas the NLW rate is based on median earnings. Unlike the NMW and NLW, the living wage is not a legally enforceable minimum wage.
The UK living wage rate is set independently and updated annually in November (in line with living wage week) and is currently £7.85 per hour, 17% higher than the adult rate of NMW. There is also a London living wage rate which is currently £9.15. There are now almost 1,700 accredited living wage employers across the UK and it has cross-party support with public backing from the Prime Minister.
The summer budget announced the government’s intention to legislate so that people working 30 hours on the NMW will not pay income tax. This will be implemented in practice by ensuring that once the income tax personal allowance has reached £12,500 (by 2020), it will always be set at least at the equivalent of 30 hours a week on the NMW, rather than indexed on the basis of price inflation.
A formal review is taking place to assess options for changing the timing of the NMW setting cycle so it is aligned with the income tax personal allowance cycle. The review is considering the issues for both businesses and workers and is expected to report to ministers before the end of 2015. Subject to the review, the earliest alignment could happen is April 2017.
Compliance and enforcement
Further measures to ensure people receive the pay they are entitled to have been announced in recent months. The measures include working with payroll providers to make sure payroll software contains checks that ensure employees are being paid what they should be. Other measures include doubling the penalties for non-payment of the national minimum wage and the new national living wage.
The calculation of penalties will rise from 100% of arrears to 200%, but will be halved if employers pay within 14 days. The enforcement budget will be increased and a new team will be set up within HMRC to take forward criminal prosecutions for those who deliberately do not comply. They will ensure that anyone found guilty will be considered for disqualification from being a company director for up to 15 years.
The government has invested many resources into strengthening deterrents, and statistics on NMW enforcement for 2014-15 shows that HMRC identified £3.2m in arrears involving over 26,000 workers across a range of sectors.
A key initiative, with the catchy title of ‘national minimum wage campaign’ was launched in August 2015 to give employers the opportunity to ‘check it; fix it; change it’. It started with the hairdressing and beauty industry, which is predominately female and the aforementioned statistics show that over three quarters of the affected workers in 2014-15 were female.
Under the NMW campaign those employers paying under the minimum wage have a chance to put things right - if they tell HMRC about any arrears immediately they won’t have to pay a penalty and won’t be named and shamed publicly. HMRC will provide employers with tailored tools and guidance to check if they are paying the correct amount, and put it right where they are not.
CIPP findings from the consultation on NMW and NLW
The remit of the low pay commission (LPC) is to provide advice to the government on matters relating to the NMW, and this remains unchanged. However, this year the LPC has been asked to report twice, firstly by early February 2016 on the future level of the NMW rates, and secondly by October 2016 giving recommendations for the rate of the NLW from April 2017. The report on the NLW is a new remit for the LPC as they will need to ensure that the rate is set at a sustainable level and continues to take account of broader economic conditions.
The CIPP recently submitted their response to the consultation on the national minimum wage (NMW), which aims to support the work of the LPC in gathering views on the existing rates and evidence on the potential impact of the NLW. We surveyed CIPP members and the wider profession, and there are certainly concerns from respondents who currently pay at or slightly above the rate for NMW.
- Complexity – two titles could potentially result in slight differences in administration and certainly add another layer of complexity to the operation of the NMW.
- Guidance, which is largely considered to be good, needs to continue to be clear, concise and delivered in a timely manner so as to ensure that all employers become aware, before April 2016 of this new pay element.
- Implementation dates should be aligned, as having two does nothing to simplify the processing of pay. Therefore we would urge that the two are aligned at the earliest available opportunity. October would be considered the most consistent month to apply, but April would align with the month where the majority of payroll changes are currently made.
- The suddenness of this announcement and its subsequent implementation has not allowed a significant amount of lead in time – sufficient but not significant time. Setting aside the short, medium and long term budget needs of employers, what was clear from our survey was that payroll software is critical to the success of NMW operation, lead-in times for new policies and rates need to take into account the requirements of payroll software developers.
- The limitations that this has on an employer’s ability to set their own pay and reward structure. We are assuming that the NLW rate will equally restrict employers from offering a pay package that includes an element of salary sacrifice where the worker is paid no more than NMW and NLW rates?
- As the rates of NMW and NLW continue to rise, so it becomes more of a challenge to maintain the differential where higher rates are paid as a result of promotion or qualifications. Comment was made within the survey response at how there is a risk, however small, that where statutory rates become so high, the incentive to develop skills and advancement is lost.
Some of these concerns are already being addressed but we shall have to await the outcome of the various reviews and the government’s response to this consultation to see if the complexities are eased any further for employers and payroll professionals.