What counts towards minimum wage and what doesn’t? A must-read for employers
With the National Minimum Wage (NMW) increasing in April 2025, are you sure you are calculating it correctly?
From 1 April 2025, the new rates will be:
- 21 and over £12.21 per hour (up from £11.44)
- 18 to 20 – £10.00 per hour (up from £8.60)
- Under 18 and apprentices – £7.55 per hour (up from £6.40)
For businesses, this means an increased wage bill – but also an increased risk of getting calculations wrong.
When it comes to minimum wage compliance, errors can be costly.
Underpaying staff, even accidentally, can lead to penalties from HM Revenue & Customs (HMRC), backdated payments, and even public naming and shaming.
One of the most common mistakes employers make is misunderstanding what does and does not count towards minimum wage calculations.
What is not included in minimum wage calculations?
Some payments might seem like part of an employee’s wage but are not counted when determining whether they meet the legal minimum. These include:
- Deductions for the employer’s benefit – If a worker pays for something required for the job (e.g. uniform, tools, or safety equipment) and is not reimbursed, it reduces their overall wage.
- Travel to work costs – If an employer pays for commuting, this amount is not counted towards minimum wage.
- Tips, service charges, and cover charges – Even if a worker regularly receives tips, they do not contribute to minimum wage pay.
- Extra pay for unsocial hours – Bonuses for working late shifts or on weekends are on top of minimum wage, not included in it.
What is included in minimum wage calculations?
On the other hand, certain payments do count towards minimum wage calculations, including:
- Income Tax and National Insurance contributions – Minimum wage is calculated on gross pay, before deductions for tax and NI.
- Wage advances and repayments – If an employee has an advance on their wages or repays a wage-related loan, their gross pay still counts in full.
- Accommodation provided by the employer – If an employer provides housing above the offset rate (£9.99 per day or £69.93 per week), the excess can count towards minimum wage.
- Repayment of overpaid wages – If an employee is overpaid and repays the amount, their minimum wage is still based on their original gross wage.
- Voluntary deductions – Things like meals bought at work (if not a requirement of the job) do not impact minimum wage.
The damage employers face when miscalculating wages
Employers who miscalculate wages risk:
- HMRC investigations – Inspectors can check payroll records at any time.
- Backdated payments – Any underpayments must be repaid immediately.
- Fines – Employers face penalties of up to 200 per cent of the underpayment (capped at £20,000 per worker).
- Being publicly named – The Government regularly publishes a list of employers who fail to comply.
Have you reviewed your payroll practices recently? With the April 2025 wage rise looming, there is no better time than now. now is the time to review your payroll practices.
Get in touch with our team today for assistance with ensuring your calculations are correct, deductions checked, and that your employees receive the pay they are entitled to.
