Understanding your responsibilities when it comes to the National Minimum Wage

Updated: 18th October 2021

I can't afford to pay National Minimum Wage or National Living Wage

With an ever-increasing cost of living, caused by soaring fuel, housing, and food costs coupled with stagnant incomes, lower-earning households have felt the squeeze particularly hard. The pressure has been on the government to improve the wages of those at the bottom of the earnings ladder by increasing rates of both national living wage and national minimum wage. While this is undoubtedly welcome news to those workers given a boost to their pay packets, on the other side of the coin, the cost of being an employer is soaring.

Increased wages also come with increased NICs and income tax contributions for employers, as well as a higher amount needing to be placed into auto enrolment pension schemes. This increasing financial burden could see some already distressed businesses being pushed to breaking point, particularly if they are unprepared for the increases. Here is what you need to know about paying the National Living Wage (NLW) or National Minimum Wage (NMW), and what you should do if you are unable to meet these costs.

Can’t afford to pay National Minimum Wage

What is the difference between National Living Wage and National Minimum Wage?

Both represent the minimum level an employee must be paid; however, the difference in which one is applicable to any given individual comes down to their age. The NLW is applied to those aged 25 and above; NMW is given to anyone below 25. For the 2019/20 tax year, the NLW is £8.21 an hour which is applicable to all workers above the age of 25. Rates for NMW are slightly more complicated as they are tiered according to age. They are as follows:

  • Aged 21-24 - £7.70 (2019/20 tax year)
  • Aged 18-20 - £6.15 (2019/20 tax year)
  • Aged 16-17 - £4.35 (2019/20 tax year)
  • Apprentices 16-18 (or first-year apprentices aged 19+) - £3.90 (2019/20 tax year)

How are pensions affected?

As contributions to auto enrolment pension schemes are based on a percentage of qualifying earnings, any increase to an employee’s salary will likewise see you having to pay more towards their pension.

Just as with the National Minimum and Living Wage rates, pension contribution levels also rose in April 2019, going up to 8% of qualifying earnings. While employees will bear the brunt of this, having to contribute 5% of this amount, employers’ contributions make up the remaining 3%.

Do I have to pay National Living or National Minimum Wage?

Quite simply – yes. These are the legal minimum rates you must pay to any employee regardless of the hours they work, length of service, or the duration of their contract. Failure to remunerate employees accordingly is against the law.

You should not confuse the National Living Wage with the ‘UK living wage’. This is a voluntary scheme set up by the Living Wage Foundation which encourages employers to pay their staff a higher rate of pay than current NLW levels. This is not compulsory, although several big-name employers have decided to adopt these recommended rates of pay.

What happens if I can’t pay National Living or National Minimum Wage?

It is a criminal offence not to pay employees either the National Minimum Wage, or the National Living Wage, depending on which scheme is applicable to them. Failure to adhere to your responsibilities when it comes to correctly remunerating employees can lead to you being handed a significant fine from HMRC once this is discovered. Not only would you be required to repay staff all the money they are owed, you will also face an additional financial penalty up to 200% of the amount you have been found to have underpaid.

What should I do if I cannot afford to pay the National Living or National Minimum Wage?

If your company’s finances are stretched to the point that you can no longer continue paying your employees’ wages at the legal rate, you need to take swift action. An inability to pay wages is often an indicator of deeper financial concerns which need to be promptly addressed. You should contact an insolvency practitioner at the earliest possible opportunity and explain the financial issues your company is experiencing.

Consider potential financing options

In many cases it is a problem with cash flow which prevents a company from comfortably paying its staff what they are due. An insolvency practitioner will be able to consider your situation in more detail and advise the options available to you. You may be able to consider a form of invoice financing, including factoring and discounting, which may be able to ease your cash flow worries. Invoice financing works by giving you access to an agreed percentage of your unpaid invoices immediately upon you issuing them to customers. This can provide a much-needed level of certainty when planning your cash flow for the coming weeks and months, including staff wages. Although there is a fee associated with doing this, for some businesses the ability to plan ahead is worth the financial cost.

Formal insolvency procedures

If your company’s inability to comply with NLW and NMW regulations is caused by deeper rooted concerns, you may need to consider whether a formal liquidation procedure could be the most appropriate solution to your problems. There are a range of corporate insolvency procedures available; not all of these result in the closure of a company.

  • Rescue and recovery
    Processes such as CVAs and company administration are entered into with the aim of stabilising and rescuing an ailing company by restructuring debts and renegotiating long-term liabilities. This can immediately cut costs, improving liquidity both now and also in the future. However, in order to enter into such a process there must be a viable business worth saving and you must be able to demonstrate that your company has a realistic chance of a successful and profitable future.
  • Company liquidation
    If your business is struggling to meet its liabilities, including paying legal minimum salaries, there comes a time when looking at methods of closure is the only option left. For an insolvent business, this is typically done by way of a Creditors’ Voluntary Liquidation (CVL). Once it has been ascertained that a CVL is the best route for a company, the appointed insolvency practitioner will being the process of placing the company into liquidation which will include liaising with creditors, selling assets, and distributing proceeds accordingly. By the conclusion of the process, the company will cease to exist and all outstanding liabilities will be written off (unless personally guaranteed).

If you are struggling to pay your staff the National Living or National Minimum Wage, contact Real Business Rescue today. You can arrange a free no-obligation consultation with one of our licensed insolvency practitioners who will be able to assess your financial position and advise you on your next steps.

Keith Tully


0800 644 6080
Director Support - Business suffering from Cash-Flow Problems?
If your company is financially distressed, we also offer the below services:
Business debt recovery

  • Recover Unpaid Invoices of £5k+
  • Expert Credit Control Services
  • Stop Late Payers & Bad Debts
Visit Site
Time to pay experts

  • Get Breathing Space with HMRC
  • Support with Business Tax Arrears
  • 35 Years HMRC Negotiation
Visit Site
UK Business Finance

  • Rejected for a CBILS Loan?
  • Get Emergency Business Funding
  • Supporting 1000+ UK Companies
Visit Site
Who we help
  • Company Directors
  • Finance Directors
  • Sole Traders
  • Accountants
  • Small Businesses
  • Large Businesses
  • Partnerships

This site uses cookies to monitor site performance and provide a more responsive and personalised experience. You must agree to our use of certain cookies. For more information on how we use and manage cookies please read our PRIVACY POLICY