The National Living Wage (NLW) is the highest band of the UK’s statutory minimum pay and applies to all workers aged 21 and over. It is set by the government each April following recommendations from the Low Pay Commission and is legally enforced by HMRC.
How the rates are set
Minimum wage rates change on 1 April each year. The Low Pay Commission recommends new rates in the autumn, the government usually announces them at the Autumn Budget, and they apply from the first pay reference period starting on or after 1 April. The current hourly rates are published on GOV.UK.
There are four bands:
| Band | Who it applies to |
|---|---|
| National Living Wage | Workers aged 21 and over |
| 18 to 20 rate | Workers aged 18 to 20 |
| Under 18 rate | Workers above school leaving age but under 18 |
| Apprentice rate | Apprentices who qualify for it |
The apprentice rate applies to apprentices aged under 19, or apprentices aged 19 and over in the first year of their apprenticeship.
For a full overview of all age-based rates, see National Minimum Wage.
National Living Wage vs National Minimum Wage
The National Minimum Wage (NMW) is the umbrella term for all statutory minimum pay rates. The National Living Wage is simply the highest band within the NMW structure, applying to workers aged 21 and over.
| Term | Applies To |
|---|---|
| National Living Wage | Workers aged 21+ |
| National Minimum Wage | Workers aged under 21, plus apprentices |
Both are enforced by the same legislation — the National Minimum Wage Act 1998 — and carry the same penalties for non-compliance.
Real Living Wage
The Real Living Wage is a separate, voluntary rate calculated by the Living Wage Foundation based on the cost of living. It is announced each autumn, with a higher rate for London, and accredited employers implement it within an agreed period. Employers who choose to pay the Real Living Wage are not legally required to do so but may gain accreditation from the Living Wage Foundation.
Who Qualifies
The NLW applies to most workers aged 21 and over, including:
- Full-time and part-time employees
- Agency workers
- Zero-hours contract workers
- Casual and seasonal workers
- Home workers (including piece workers)
- Workers on probation
Exemptions
The NLW does not apply to:
- Self-employed people (including sole traders)
- Volunteers and voluntary workers for charities
- Company directors who are not also workers
- Members of the armed forces
- Family members in a family business who live at home
- Share fishermen paid by a share of the catch
- Prisoners in prison work schemes
Calculating Compliance
HMRC uses a specific methodology to check whether an employer is paying the NLW. The calculation looks at total pay in the pay reference period and divides it by total hours worked:
NLW compliance = Total NLW pay ÷ Total hours worked ≥ NLW rate
What Counts as NLW Pay
| Included | Excluded |
|---|---|
| Basic salary / hourly rate | Tips and gratuities |
| Incentive pay and performance bonuses | Premium for overtime or shift work (only the premium, not the basic element) |
| Piece-rate payments | Benefits in kind |
| Expenses | |
| Advances of wages | |
| Pension contributions | |
| Redundancy pay |
Salary Sacrifice
Salary sacrifice arrangements can reduce an employee’s cash pay below the NLW. An employer must ensure that the post-sacrifice cash pay does not fall below the NLW rate when divided by hours worked. If it would, the salary sacrifice must be limited to maintain NLW compliance.
Employer Obligations
Record Keeping
Employers must keep sufficient records to demonstrate NLW compliance for each pay reference period. Records created on or after 1 April 2021 must normally be kept for 6 years and must show:
- Hours worked by each worker
- Payments made
- How the NLW calculation is met
Payslips
The worker’s payslip must show pay and hours worked (for hourly-paid workers) clearly enough to verify compliance.
Enforcement
HMRC enforces the NLW and NMW. If an employer fails to pay the correct rate:
| Consequence | Detail |
|---|---|
| Arrears | Must pay back all underpayments to affected workers |
| Penalty | Up to 200% of the underpayment (minimum £100, maximum £20,000 per worker) |
| Naming and shaming | HMRC publishes the names of non-compliant employers |
| Criminal prosecution | In the most serious cases of deliberate non-payment |
NLW and Payroll Processing
The NLW directly affects PAYE payroll processing:
- Payroll software should flag any pay calculations that fall below the NLW
- Annual rate changes (each April) require payroll updates before the first pay run of the new tax year
- Employers must check that all workers aged 21+ are paid at least the NLW after any deductions that count for NLW purposes
- Auto-enrolment pension contributions are calculated on qualifying earnings, which are separate from NLW calculations
NLW Changes and Planning
The NLW typically increases each April. Employers should:
- Review pay rates in February or March each year
- Update payroll software to reflect the new rates
- Check that no workers will fall below the new NLW after the increase
- Budget for the additional cost
- Review salary sacrifice arrangements to ensure continued compliance
NLW and Accounting
Increases to the NLW affect the employer’s accounting records by raising the minimum staff cost. When budgeting, employers should factor in the additional employer National Insurance and pension contributions that accompany any increase in gross pay.