Getting Payroll Ready For The Upcoming Wage Increases

From 1 April, both the National Minimum Wage (NMW) and National Living Wage (NLW) are increasing – as announced by the Chancellor in her Budget last autumn. This means that the NMW for 18-20 year olds is increasing to £10 per hour and the NLW for those aged 21 and over will be £12.21 per hour.

These pay increases represent the government’s pledge to support workers amidst the rising cost of living, but they do present challenges for employers, particularly in managing payroll compliance.

So with the changes less than a month away, what impact will they have on businesses and how can they prepare their payroll?

The Need For Flexibility In Budgets

The new NMW and NLW rates represent an increase to the nation’s biggest line of expenditure, meaning that many businesses up and down the country will have been thinking hard about their finances and how they will afford to pay the new rates.

This, along with the upcoming increase in employer National Insurance Contributions, has caused businesses to radically reassess their finances and shown the importance of building flexibility into budgets to allow for these sorts of changes.

Many have been scrutinising their pricing strategies to absorb the increased costs, potentially leading to price increases for their customers, as well as considering cost-cutting measures such as reducing working hours, benefits or other expenses.

Looking further within the business model, the upcoming changes will also have a big impact on the payroll function, which will take the biggest hit as the department responsible for ensuring workers get their new rate of pay. They’ll have lots to consider ahead of 1 April, including making sure everything is up to date, checking salary sacrifices and deductions, and ensuring compliance with legal requirements.

Updating Systems And Revising Frameworks

The most obvious thing businesses need to do to prepare for the new NMW and NLW is to ensure their payroll systems are updated to reflect the new rates. Not only this, but they should also make sure that all employee information – including personal details and bank account information – is up to date and error-free. After all, accurate employee records are the foundation of an efficient payroll process.

To make sure all information is up to date, businesses can audit their payroll process to identify and rectify errors, discrepancies and inefficiencies before 1 April. This will ensure that the changes to pay rates run smoothly, without errors and delays.

Businesses should also consider how the new pay rates will affect their pay frameworks. The continued increases in NMW and NLW have caused a ‘bunching’ effect at the lower end of pay structures, which makes it much more difficult to differentiate between pay bands. In order to maintain clarity and fairness for employees, business leaders should address this ‘bunching’ by revising their pay frameworks and ensuring they’re still appropriate.

Being Aware Of Salary Sacrifices And Deductions

Businesses that offer benefits to their employees through salary sacrifices should be cautious when it comes to the new NMW and NLW, as deductions such as pension contributions and cycle-to-work schemes could inadvertently reduce an employee’s pay below the legal minimum.

If an individual is paid the NMW or NLW, then any deduction from their pay – voluntary or not – could be a breach of regulations. It is the employer’s responsibility to ensure that all members of their team are paid the correct rate of pay for their age, so great care should be taken ahead of 1 April.

Ensuring Compliance

With 170 pieces of legislation directly impacting the payroll process, getting it right can be easier said than done. Making a mistake, even unwittingly, can incur punishments anywhere from a steep fine to criminal prosecution, so it’s important to get it right.

And this is even more pertinent as the government ramps up its scrutiny of NMW compliance under the proposed Fair Work Agency, which will replace HMRC’s NMW unit in the 2026-27 financial year.

With the increase in pay rates, businesses will need to take careful consideration to ensure they’re compliant with things such as PAYE tax codes, NLW laws, the National Minimum Wage Act 1998, the Income Tax (Earnings and Pensions) Act 2003 and the Income Tax Act 2007.

The Risks Of Being Unprepared

Failure to prepare payroll for the new NMW and NLW can have a hefty financial consequence for businesses – the penalties imposed on employers that are in breach of regulations may be up to 200% of the arrears owed to workers.

The maximum penalty that can be applied is £20,000 per worker and these penalties can be reduced by 50% if the unpaid wages and penalties are paid within 14 days.

And not only this, but payroll errors and delays can also cause significant issues for employee morale and engagement. A single late payment can have disastrous effects on the workforce, leaving them unable to pay for regular outgoings and impacting their financial security and psychological wellbeing.

A survey showed that 49% of employees would look for a new job after just two payroll errors impacting their salary, so not getting payroll right can lead to much more complex issues, affecting staff turnover and retention.

Despite not having the most exciting of reputations, it’s important to remember that payroll drives employee morale, engagement and productivity, as well as ensuring business compliance, upholding business reputation and maintaining financial integrity. A business would be lost without it!

To make the whole process easier, businesses can consider outsourcing their payroll function to experts who are on top of all the latest changes. Outsourcing can help to alleviate the burden of administering payslips, managing pension schemes, overseeing team costs and ensuring that changes to NMW and NLW are applied.

To find out more about Duncan & Toplis, please visit www.duncantoplis.co.uk.

By Damon Tunnicliffe, Head of Payroll, Duncan & Toplis