A basic introduction to national minimum wage and living wage

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This is a basic introduction to the National Minimum Wage and Living Wage. It provides an introduction to who is covered by the National Minimum Wage, key concepts and basic principles used in calculating it.

What is it and who qualifies?

The National Minimum Wage (or “NMW”) was introduced into UK law in 1999.  The current top rate for the NMW was superimposed on the existing scheme in 2016, and was (perhaps confusingly) branded the "National Living Wage". It is, in effect, simply the highest NMW band for older (25 and upwards) workers.

NMW doesn’t just apply to employees. It also applies to a wider category of “workers”. This definition encompasses individuals (including consultants, contractors and others) who provide their own services personally to an employer or organisation. At the outer edges, it doesn’t include those people so independent, that their relationship is that of professional or business to their customer or client.

There are certain exceptions from the requirement to pay NMW. Volunteers, voluntary workers and family members (in certain circumstances) do not qualify for the NMW.  These exceptions are narrowly defined, however, and so if in doubt, it is best to obtain specific advice on status before engaging someone without pay (or below NMW rates).

There are obligations to keep records of NMW compliance; a failure to do so is a criminal offence. 

How much is it?

How much workers in the UK should receive depends on their age and if they are an apprentice. 
Current rates are set out below:   


Current rate

25 and over £7.83
21 to 24 £7.38
18 to 20 £5.90
Under 18 £4.20
Apprentice £3.70


How is it calculated?

It is important to appreciate that the calculation to determine if NMW rates have been paid is on the basis of an average.

The first step when calculating this average is, determine the period of time over which compliance with NMW minimum rates is judged. This is known as “a pay reference period”. This is simply the regular period over which a worker is paid (for example, if they are paid weekly it is every week, if monthly it is every month etc).

A pay reference period cannot be more than 31 days.

Having calculated the pay reference period, it is then important to understand which hours count during that pay reference period. This depends on the type of contract the worker is on. Which hours are included or excluded can become more complicated in specific circumstances, but the basic categories (together with a “.Gov” link explaining what is included) is shown below:

Once you know the pay reference period for the worker and the type of hours that count, you can then apply the gross pay received in each period to work out whether (in each pay reference period) the worker is receiving NMW. 

Which payments don’t count?

Certain sums won’t be disregarded when looking at whether the NMW has been paid over the reference period. The following won’t count towards satisfying the NMW:

  • loans
  • advances of wages
  • pension payments
  • retirement lump sums
  • redundancy payments
  • rewards under staff suggestion schemes
  • any premium element (on top of basic pay). This would include, for example, premia attracted for overtime or on bank holidays or at other special times
  • allowances such as London Weighting, on-call payments or similar pay allowances 
  • tips, gratuities, service charges and cover charges.

Other qualifications

Most deductions from pay will reduce the effective rate of NMW pay and have the potential to take the employees pay below NMW levels. 

Certain limited deductions won’t do this. The most common include paying back an advance (or accidental overpayment) of wages, money the individual chooses to have deducted from pay (e.g. pensions contributions) and goods or services the employee chooses to purchase from the employer.

It should also be noted that some of the value of accommodation provided by employers can be factored in to the NMW rate, up to a value of £7.00 a day or £49.00 per week.


Workers can enforce their rights to NMW in an Employment Tribunal.

Alternatively, HM Revenue and Customs enforce the NMW and have powers to obtain information and issue a “Notice of Underpayment”. Such a notice, in addition to a requirement to pay arrears, can include a penalty of up to 200% of the sum owed (up to a maximum of £20,000 per worker).

In addition, serious non-compliance can result in criminal prosecution.

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