Last summer, the UK Government confirmed the introduction of a new ‘National Living Wage’ (NLW). Effectively, the NLW creates a new tier in the UK minimum wage system. The Government have introduced the NLW as part of their overall vision to reduce the strain of welfare costs on public finances by increasing employees’ pay in line with the ever-rising cost of living.
Who will be affected?
Any employees that are aged 25 or over on 1st April, 2016 will be affected by the National Living Wage. The Government estimate that more than a million workers in the UK will be affected by the introduction of the NLW. It should be noted that the pay rate of employees earning above the NLW need not be affected.
It should be noted that individuals within the first year of an apprenticeship will not be eligible for the NLW.
Also, of importance to many of our clients, Directors without a contract of employment do not need to pay themselves the NLW. This is an important point to make when considering tax planning opportunities.
The additional cost to employers…
Currently, employees aged 25 or above must be paid at least £6.70 per hour, before deduction of income tax and national insurance. From 1st April, 2016 employers must ensure that all employees aged 25 or above are paid at least a gross hourly rate of £7.20. Therefore, employees aged over 25 currently earning the national minimum wage who work a 37.5 hour week will see their annual gross pay increase by £975 (from £13,065 to £14,040). The employer will also suffer an additional Class 1 National Insurance bill of £134.55 on the extra pay, disregarding the effect of the Employment Allowance.
What you must do now
- Check which of your employees will be eligible for the new NLW
- Adjust your payroll system to reflect the increased hourly rate of pay from 1st April, 2016
- Inform your staff about the increase in their rate of pay
How we are helping our clients with the NLW
If you are an e-ccountant client for whom we take care of the payroll & PAYE side of things, then you will shortly be receiving an email and/or telephone call from us. We will inform you of the names of the employees within your business for whom the NLW will affect. We will make the change to the rate of pay automatically on your behalf.
If you have any questions regarding the National Living Wage, please Contact Us.