As we move into the new tax year, it’s a good time for employers to review their responsibilities around the National Minimum Wage (NMW) and National Living Wage (NLW), particularly in light of the recent rate increases. One common source of confusion is making sure that deductions from a worker’s wages do not reduce their pay below the legal minimum.

Minimum wage rate increases

The NMW and NLW rates have increased, as previously covered in Employer Focus.

Employers need to ensure that they are paying workers in line with the increased rates. From April 2025:

• The NLW (for workers aged 21 and over) increased from £11.44 to £12.21 per hour, and
• The NMW (for 18-20 year olds) increased from £8.60 to £10.00 per hour.

These increases are significant, and employers must ensure that deductions do not inadvertently reduce a worker’s pay below the new rates.

Risk of taking pay below minimum wage

Employers must make sure that any deductions they make don’t reduce employees’ pay below the NMW/NLW. This can occur even where it looks like employees are safely paid over the required rates.

For example, if a worker earns £13 per hour and works 35 hours a week (£455 per week), and the employer makes a £40 deduction for a uniform, the worker’s pay for minimum wage calculation purposes is treated as £415, equivalent to £11.86 per hour. Prior to April 2025, this would have been above the NLW (£11.44 per hour). However, from April 2025, the worker is now being paid below the NLW (£12.21 per hour).

Which deductions affect pay for minimum wage purposes?

In general, deductions will reduce pay for NMW/NLW purposes if they:

• relate to costs connected with the employment; or
• are made for the employer’s use and benefit.

As seen in the example above, if a deduction is made for items necessary for the job, such as a uniform, this will reduce the worker’s pay for minimum wage calculations.

However, not all deductions affect minimum wage calculations. Any amounts that are a worker’s personal liability but are simply paid to a third party on their behalf will not be deducted from pay for NMW/NLW purposes. Examples of deductions that do not reduce pay for minimum wage purposes include:

• Income Tax and National Insurance Contributions.
• Student loans repayments.
• Employee pension contributions (other than pension contributions made under salary sacrifice arrangements).
• Overpayment of wages made by mistake.

HMRC list some further exceptions in their National Minimum Wage manual.

Practical Tips 

• Stay informed: Ensure you understand how deductions can impact minimum wage calculations. GOV.UK provides guidance on calculating minimum wage.
• Check: It is crucial to have processes in place to check that deductions don’t push pay below minimum wage, GOV.UK offers a calculator to assist with this.
• Review salary sacrifice schemes: Employers must ensure that these arrangements don’t result in pay dropping below the minimum wage.
• Be transparent: Ensure workers can clearly see all deductions on their payslips and appropriate documentation is in place.

Employers who fail to pay minimum wage to workers may be required to reimburse workers, face financial penalties, and, in serious cases, be subject to criminal sanctions.

This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.  

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