Why Pay the National Minimum Wage?

Newsletter issue - March 09.

If your business is under pressure to keep costs low, you may be tempted to pay the lowest possible wage you can get away with. But you must not take a chance with paying below the national minimum wage (NMW). The current legal NMW hourly rates depend on the worker's age as follows:

  • 22 and over: £5.73
  • 18 to 21: £4.77
  • 16 and 17: £3.53

If you don't pay at least these rates, and Tax Office find out, you are likely to get hit with an immediate and automatic fine. The fine will vary between £100 and £5,000, depending on the amount of underpaid wages that exist when the problem is discovered. If the underpayment is very serious the Tax Inspector can recommend that your case should be heard in the Crown Court, which can impose an unlimited fine.

You will also have to pay the underpaid wages to your workers for all relevant pay periods falling in the last six tax years. These underpayments of wages must be made good at the current NMW rates, not at the rates that applied when the work was done.

However, do note that minimum wage legislation doesn't apply to people living in a family and working in the family business. This doesn't include Limited Companies but as far as working directors are concerned who don't have an explicit contract of employment, they are not subject to minimum wage legislation, so it can help to avoid giving them such a contract where you want to use dividends instead as a more tax efficient profit extraction strategy.

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