National Minimum Wage Compliance: A New Challenge for Struggling SMEs

In light of HMRC’s intensified efforts to address National Minimum Wage (NMW) noncompliance, small and medium-sized enterprises (SMEs) face increasingly complex compliance requirements. As part of a targeted approach, HMRC is focusing on specific UK regions such as Belfast, Liverpool, East Anglia, Watford, and the North East, and expanding its crackdown gradually across the country.

Kyle Newton, Head of National Minimum Wage at Azets UK, highlights that compliance is more intricate than most SMEs assume. National Minimum Wage compliance is governed by five essential pillars, each of which must be adhered to in order to avoid falling short of legal requirements.

The Five Pillars of National Minimum Wage Compliance

1. Worker Type: National Minimum Wage calculations are not uniform across all employee categories. The classification of workers—salaried, time-based, output-based, or unmeasured—dictates the methodology for determining compliance. For salaried workers, for instance, the National Minimum Wage calculation varies by the start date of their employment, meaning individual calculations for each employee.
2. Working Time: Beyond the standard hourly pay, employers must account for additional hours worked. For salaried employees, even brief extra work beyond regular hours (like working through lunch or logging in after hours) necessitates a top-up payment to ensure National Minimum Wage compliance. Employers are also required to track time spent on pre- and post-shift activities, such as changing into uniforms, to ensure compliance.
3. Entitlement: The definition of ‘worker’ for National Minimum Wage purposes extends beyond those classified as employees under PAYE. Volunteers or individuals receiving vouchers or other forms of payment could qualify as workers, requiring employers to ensure that any form of payment complies with National Minimum Wage laws.
4. Payments and Deductions: While salary sacrifice schemes are well understood by employers, other deductions—such as those related to in-house benefits programs—can present risks. A recent tribunal ruling, Commissioners For Revenue and Customs v Lees of Scotland Ltd (2024), found that deductions made to create a staff holiday fund inadvertently reduced pay below National Minimum Wage, leading to noncompliance. Employers must ensure that funds are managed through independent, ringfenced accounts.
5. Record-Keeping Policies and Controls: Without accurate records of hours worked or tasks completed, employers are vulnerable to HMRC recalculating arrears based on employee testimony. Robust record-keeping, particularly concerning overtime and time-off-in-lieu, is essential to avoiding disputes and penalties.

HMRC’s Enforcement Approach

To ensure compliance, HMRC follows a three-stage process:

1. Nudge Letters: Initially, HMRC sends a ‘nudge letter’ to employers suspected of noncompliance, encouraging them to rectify the situation. Companies that comply face no penalties.
2. Phone Consultation: If a nudge letter doesn’t resolve the issue, HMRC offers a phone consultation to guide the company towards compliance.
3. Penalties: Rejection of the phone consultation can result in significant penalties, including fines equivalent to 200% of arrears and public naming and shaming on Gov.uk. This reputational damage can severely impact an SME’s recruitment and supplier relationships, making compliance crucial for business growth.

Steps to Strengthen Compliance

Newton urges accountants working with SMEs to conduct worst-case scenario analyses and strengthen internal controls in high-risk areas. This includes reviewing and updating policies, ensuring that contracts align with National Minimum Wage legislation, and training staff to report any payroll-related issues.

The Institute of Chartered Accountants in England and Wales (ICAEW) Technical Manager Peter Bickley advises that employers must be extra cautious when offering benefits such as uniforms, savings plans, or concessionary goods, as these may inadvertently breach National Minimum Wage rules. Even if well-intentioned, such schemes can expose employers to enforcement action if they reduce wages below the legal minimum.

SMEs need to approach National Minimum Wage compliance proactively by adhering to the five core pillars, maintaining detailed records, and addressing potential risks early. With HMRC intensifying its scrutiny, failure to comply could lead to financial penalties and reputational harm, hindering future growth. For business owners, ensuring that National Minimum Wage compliance is built into everyday operations is key to avoiding these pitfalls.

Why K2 for National Minimum Wage Compliance

K2 Accountancy Group is well-positioned to help SMEs navigate the increasingly complex landscape of National Minimum Wage compliance. With HMRC ramping up its enforcement efforts, particularly targeting SMEs across the UK, K2 can provide the guidance and expertise necessary to ensure your business meets all National Minimum Wage obligations. Our team understands the intricacies of National Minimum Wage regulations, which extend far beyond simply paying employees the correct hourly rate. By working with us, SMEs can proactively address potential compliance issues and avoid costly penalties or reputational damage.

We assist in auditing your current payroll processes and worker classifications to ensure that all employees are categorised correctly, whether they are salaried, time-based, output-based, or unmeasured. Our consultants will help you track working time effectively, including overtime, breaks, and pre- or post-shift activities, to ensure these are correctly factored into National Minimum Wage calculations. Additionally, we can support your record-keeping efforts, providing solutions to ensure that all necessary documentation is maintained and readily accessible in case of an HMRC review.

K2 Accountancy Group also advises on managing employee benefits and deductions, ensuring that initiatives such as salary sacrifice schemes or staff holiday funds are fully compliant with National Minimum Wage regulations. With our comprehensive, hands-on approach, we aim to minimise risk while ensuring that your payroll systems and policies are fully aligned with the law. Our goal is to provide SMEs with peace of mind, knowing that their National Minimum Wage compliance is being expertly managed and continuously monitored.

All information provided in this article should be considered to be general and not specific advice from the K2 Accountancy Group. For further information on your specific circumstances and how to remain compliant with HMRC’s regulations, please contact us directly.