Calculating the minimum wage
How to calculate the average hourly rate, and the number of hours worked over a specific period so that you pay the correct wage; includes example calculations.
To check that minimum wage has been paid for a worker you need to take the following steps:
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Ensure you are paying the individual in the correct way for the work that they do. The 4 different ‘types’ of work are covered in Types of work.
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Identify the particular period for which the worker is paid. See Pay counted during a pay reference period for the purposes of the minimum wage.
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Work out the average hourly rate of pay for the pay reference period. To do this:
– calculate the pay for the period (in accordance with minimum wage rules on what counts as pay, minus any deductions)
– calculate the hours worked in the period (in accordance with minimum wage rules on what count as hours of work)
– divide the pay for the period by the number of hours worked in the period, to give an average hourly rate for the period -
Identify the minimum wage rate that applies to the worker.
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Check that the average hourly rate of pay for the period is not less than the relevant minimum wage rate. If it is less, you need to pay the worker an extra amount so that at least minimum wage has been paid.
For minimum wage purposes, a pay reference period is the period of time for which someone is paid. It can cover any period of time up to 1 calendar month, but never more than that. For example, for someone paid weekly the pay reference period is 1 week, and for someone paid every 2 weeks the pay reference period is 2 weeks. The actual date of payment does not affect the pay reference period – it is simply the period of time covered by the payment.
You must ensure all workers are paid at least the minimum wage for the hours worked in each pay reference period.
You may pay more in one pay reference period to make up for paying less than the minimum wage in the period immediately preceding – as long as the extra pay relates directly to the underpaid amount.
An example of when this would occur is when it is not possible to calculate pay accurately (for example, in relation to overtime or additional hours worked after payroll cut off dates) in time to be included in the pay reference period to which the earnings relate.
When the minimum wage rates change, the increase applies to the first pay reference period starting on or after the date of any change. For example, if the annual minimum wage increase takes effect on 1 April and a worker’s pay reference period also starts on 1 April, the increase applies with immediate effect. However, if the worker’s pay reference period starts on, say, 16th of the month, they will be eligible for the old rate 16 March to 15 April and for the new rate with effect from 16 April, at the start of the new pay reference period.
The same approach applies when a worker reaches a birthday that makes them eligible for a higher minimum wage rate.
Deferred pay
For minimum wage purposes, the pay allocated to a pay reference period is any pay, either:
- received by the worker during that period (unless it is pay for the previous period)
- earned in that period but not received until the next pay reference period
For example, if a worker earns commission towards the end of one pay reference period it may not be possible to calculate their earnings in time to be included in their pay for that period. If you pay the commission to them in the next pay reference period, the amount will still count towards the previous period in which they earned it.
However, if you delay payment by more than one pay reference period you can’t usually count the amount towards the period in which the worker earned it. Instead it counts towards the period in which it is paid.
Where payment is not made in the period in which it is earned, you will not be able to calculate the worker’s minimum wage rate for the original pay reference period until the end of the next pay reference period.
You can’t count the same pay against more than one pay reference period. So if you pay an amount in one pay reference period which is actually for the previous pay reference period, it only counts for the previous period, and not also for the one in which it is paid.
Allocating annual bonuses
Most of an annual bonus received in a pay reference period will count towards the minimum wage only in that period. However, a proportion of the bonus can count towards pay received in the previous pay reference period.
Example calculation
(using 2023/2024 minimum wage rates)
If you pay an annual bonus in December and the pay reference period is 1 month, you can count one-twelfth of the bonus towards minimum wage pay in November. The rest of the bonus counts towards minimum wage pay in December.
You pay £1,563 per month to a 23-year-old worker who works 150 hours each month. You pay them a bonus in December of £500 for work performance in the 12 months ending on 31 December.
None of the annual bonus can count towards the January to October periods, their hourly rate calculation remains as:
£1,563 ÷ 150 hours = £10.42 per hour.
For the November pay reference period you can use a twelfth of the bonus towards minimum wage pay.
- the proportion is that which relates to that pay reference period: £500 ÷ 12 months = £41.67
- the worker’s total minimum wage payment for November is: £1,563 + £41.67 = £1,604.67
- the hourly payment for November is: £1,604.67 ÷ 150 hours = £10.70
For the December pay reference period you can include the remaining total of the bonus: £500 - £41.67 = £458.33.
- the total minimum wage pay is £1,563 + £458.33 = £2,021.33
The hourly pay for December is: £2,021.33 ÷ 150 hours = £13.48
In both pay reference periods, the worker is being paid above the minimum wage of £10.42 per hour.
Allocating pay based on timesheets
Some workers, typically agency workers, record the time they have worked during a pay reference period on timesheets, and are not entitled to be paid until they have submitted the timesheets to their employer (or the agency).
Hours recorded on a timesheet will count towards the minimum wage for the pay reference period in which the worker worked the hours. You must pay the worker for those hours either in that pay reference period or the next pay reference period.
However, if a worker submits their timesheet late (which means less than 4 working days before the end of the pay reference period after the period in which they did the work) then a special rule applies (set out in Reg 9(2)(c) of NMW Regulations 2015). In these circumstances, for the purposes of calculating minimum wage, you have until the end of the pay reference period after the period in which the timesheet was submitted to pay the worker. In this case, the pay will still count for the pay reference period in which the hours were originally worked. (This example only considers the requirements of the minimum wage rules. Other requirements may apply, for example under regulation 12 of the Conduct of Employment Agencies and Employment Businesses Regulations 2003.)
For example, you pay a worker with a monthly pay reference period at the end of each month. To be able to count pay towards the hours recorded on their time sheet as worked in May then you must pay the worker for those hours in either May or June.
However, if the worker gives you their timesheet 2 days before the end of June (which is late), then you may pay the worker for those hours in either June or July.
A worker’s pay for minimum wage purposes must be calculated in a particular way. Some elements of pay do not count for minimum wage purposes. Wrongly including an element of pay that doesn’t count – for example an extra premium for overtime – can result in it appearing that the minimum wage is being paid when in fact it is not. See Overtime and shift premia for more detail.
The starting point is the worker’s gross pay before any deductions are made.
See further guidance on Deductions from pay and payments by workers that do not reduce minimum wage pay and Salaried-hours work.
Incentive pay
Incentive payments count towards minimum wage pay if they relate solely to the performance of a worker, such as payments made as part of an incentive, sales commission, merit or any performance-related pay scheme.
Bonuses
Bonus payments count towards minimum wage pay. See Allocating annual bonuses.
The following payments, or elements of a worker’s pay, made by an employer do not count towards minimum wage pay:
- tips, gratuities, service charges and cover charges
- overtime and shift premia
- allowances
- payments by an employer to reimburse a worker’s expenses
- benefits in kind
- loans
- advances of wages
- pension payments
- lump sums on retirement
- redundancy payments
- rewards under staff suggestions schemes
- shares and share options
The treatment of some of these elements of pay for minimum wage purposes is explained in more detail below.
Tips, gratuities, service charges and cover charges from customers
Tips, gratuities, service charges and cover charges do not count towards minimum wage pay. This is regardless of whether they are paid through your payroll or are given direct to workers by customers or a tronc master. For detailed guidance see National Minimum Wage: code of best practice on service charges, tips, gratuities and cover charges.
Overtime and shift premia
You may pay a worker at a higher rate than their standard pay rate for some of the work they do – for example for working:
- overtime, weekend or night shifts
- on bank holidays
- longer than a certain number of hours
If you do, the premium element of pay – that is, the amount by which the higher pay rate exceeds the worker’s basic rate – does not count towards minimum wage pay. This only applies to time work and output work; it does not apply to salaried hours work or unmeasured work.
To calculate the premium element where the same basic rate applies to all the work done by a worker in a pay reference period:
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Calculate the amount that the worker has been paid above their basic rate (amount of additional rate x number of hours worked at additional rate).
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Calculate the worker’s minimum wage pay by subtracting the premium element calculated above.
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Divide the minimum wage pay by the number of hours worked in the pay reference period.
The remainder (the premium element) does not count towards minimum wage pay.
Example calculations
(using 2023/24 minimum wage rates)
Example 1 – Shift allowance
A 25-year-old worker works 20 hours per week and receives a total pay of £215. This implies that on average they are paid £10.75 per hour (£215/20 = £10.75). However, they work 10 hours per week Monday to Friday at their basic rate, and the remaining 10 hours they work on Saturday and Sunday attracts a shift premium of £0.90 per hour.
Their minimum wage pay is calculated as follows:
1. Work out the amount they have been paid above their basic rate:
£0.90 (shift premium per hour) x 10 = £9 premium for the Saturday and Sunday work
2. Work out the minimum wage pay by taking away the premium element from the total pay:
£215 (total pay) - £9 (the premium element) = £206 (total minimum wage pay)
This gives an average hourly rate of £10.30 (£206/20 = £10.30). This is below the National Living Wage rate of £10.42 an hour, so does not comply with the minimum wage and the worker is underpaid.
Example 2 – Increased overtime rate
A 30-year-old worker works a total of 40 hours in a week. 30 of these hours are paid at the basic rate of £10.34 per hour and 10 hours are overtime paid at £10.95 an hour. Their total pay for the week is £420, and this therefore implies that on average they are paid £10.50 per hour (£420/40).
To calculate minimum wage pay:
1. Work out the amount the worker has been paid above their basic rate (the premium element):
£10.95 - £10.34 = £0.60 x 10 hours = £6.00
2. Find the minimum wage pay by taking away the premium element from the total pay:
£420 - £6 = £414
3. Divide the minimum wage pay by the hours worked:
£414 ÷ 40 = £10.35
This does not comply with the minimum wage as the worker is entitled to the National Living Wage rate of £10.42 an hour and is underpaid.
Different pay rates for different jobs
If you pay a worker doing time work or output work different basic rates for different jobs or different duties - rather than premium rates for the same job – then the whole of each rate can be included in the calculation of minimum wage pay.
Example scenario
(using 2023/2024 minimum wage rates)
A worker works 10 hours per week doing semi-skilled work on a machine in the factory and is paid £10.34 an hour for this duty. They also work 10 hours per week helping to clean the factory and are paid £10.95 an hour. This would equate to £10.65 per hour (£213/20) overall, which is above the National Living Wage.
The worker must be paid – on average – at least the minimum wage for all hours worked within a pay reference period. When carrying out different duties for differing pay rates – the key is that the total pay for the total number of hours in the pay period is equal to, or above, minimum wage rates.
There is no premium to subtract in this case.
Allowances
Some employers pay workers special allowances over and above standard pay. For example, if the worker:
- works in dangerous conditions
- works unsocial hours
- works in a particular area, for example, London Weighting
- performs special duties over and above a worker’s normal duties
- attends work punctually
- is on call for work
These allowances don’t count towards minimum wage pay unless you consolidate them into the worker’s standard pay or they relate to the worker’s performance. Note that where payments are consolidated, they may still not count for minimum wage pay to the extent that they comprise a premium element, such as for overtime or unsocial hours. See Overtime and shift premia.
There is no definition to determine when an allowance is consolidated into standard pay. A view has to be taken as to whether the allowance is amalgamated into the overall pay arrangement. Indications that an allowance is consolidated into standard pay can include (but is not restricted to) circumstances when the allowance is:
- treated in line with the overall pay package, such as being treated the same with regard to annual pay increases or decreases, and/or
- included in pensionable pay, and/or
- included when calculating any overtime rate
Payments by an employer to reimburse a worker’s expenses
If you reimburse a worker for money which the worker has spent on something to do with their job, the reimbursement does not count as minimum wage pay. The refund is a reimbursement of the payment made by the worker and therefore there is no overall effect on minimum wage pay.
However, if a worker spends money on something connected with their employment – for example, tools or equipment – and is not repaid by you then that amount will reduce their pay for minimum wage purposes. See Deductions from pay and payments by workers that reduce minimum wage pay.
Benefits in kind
Benefits in kind do not count towards minimum wage pay, even if they have a monetary value. However, there are special rules where you provide a worker with accommodation. See Benefits in kind and Living accommodation.
Employers that provide salary sacrifice flexible benefit schemes must ensure that the salary sacrifice does not cause a worker’s pay to drop below minimum wage rates.
In a genuine salary sacrifice, a worker gives up a portion of their pay in return for a non-cash benefit. As this amount is ‘sacrificed’ by the worker, it reduces their pay and so cannot be used as part of their pay for minimum wage purposes.
Certain deductions made by you from a worker’s pay, or payments made by the worker to you, reduce pay for minimum wage purposes. Certain other deductions or payments do not reduce minimum wage pay.
A deduction, or payment from a worker to an employer, becomes a minimum wage issue when it risks reducing the worker’s pay below their minimum legal entitlement.
If a transaction reduces a worker’s minimum wage pay, it does so in the pay reference period in which it is made, even if it actually relates to another pay period.
This continues to be the case after employment ends. If a deduction is made from a worker’s final payments, it will still be considered in the normal way to assess whether or not the worker is receiving minimum wage pay. For example, if an employer makes a deduction from a worker in their final pay for mandatory training undertaken throughout the employment, the deduction will still be considered in the same way as in any other pay reference period. If the deducted amount reduces the worker’s pay below minimum wage rates for that pay period, the worker will be underpaid.
A deduction by the employer, or a payment from the worker to the employer, is considered to be for an employer’s ‘own use and benefit’ where they are free to use that money in any way they wish.
It does not matter whether or not:
- the employer makes profit from the transaction
- the deduction is made from gross or net pay
- the worker agrees to the deduction/payment
- the worker benefits from the arrangement
For example, if you provide transport for your workers at a loss, any deductions you make from wages for providing it help to reduce your loss. The amount you gain by making the deductions is for your own use and benefit.
However, some deductions and payments, despite being for the employer’s own use and benefit, do not reduce a worker’s pay for minimum wage pay purposes. These are:
- deductions or payments in respect of the worker’s conduct or any other event where the worker is contractually liable (for example, a restaurant worker breaks a glass and their wages are docked to pay for the breakage)
- deductions or payments in respect of an agreed loan or advance of wages
- deductions or payments in respect of an accidental overpayment of wages
- deductions or payments in respect of the purchase by the worker of shares, stocks, bonds, share options, or a share in a partnership
- payments (but not deductions) where the worker has purchased goods or services from the employer (unless this purchase is made to comply with a requirement imposed by the employer in connection with the employment and is not reimbursed by the employer)
- certain deductions or payments made in respect of living accommodation
It should be noted that deductions made to reflect a worker’s purchase of goods or services from the employer are not included in this list, as they would still be deemed to reduce a worker’s pay for minimum wage purposes.
If a worker chooses to purchase goods or services – from their employer – that are not in respect of an expense incurred in connection with their employment or a requirement imposed on the worker by the employer, then the effect it will have on minimum wage pay will depend on the way any cost for this is covered.
If a worker chooses to pay for the purchase via a payment from the worker to the employer (that is, the worker pays for the goods after they have been paid their wages), the payment will not reduce pay for minimum wage purposes.
If the same purchase is paid for via a deduction from wages then this will reduce pay for minimum wage purposes. It makes no difference if the worker freely chooses to make the purchase and/or signs their agreement to the purchase.
See Deductions from pay and payments by workers that do not reduce minimum wage.
Uniforms
Employers often require workers to wear specific uniforms, work wear or items of clothing in connection to the job – a dress code.
If you do not supply uniforms but require workers to wear specific items in connection with their job then any deductions for those items will always reduce minimum wage pay regardless of whether the purchase is made from you or a third party.
It does not matter whether the requirement is written into their contract or is imposed as the result of local practice or their personal circumstances, the deduction will always reduce minimum wage pay.
Where the worker instead pays for the work wear by making a purchase either from you or a third party, then this will also reduce minimum wage pay unless you reimburse, or intend to reimburse, the cost.
Note that the definition of uniform for tax purposes is narrower than this. See Expenses and benefits: clothing.
Where a worker is expected to source generic clothing (such as a plain black t-shirt and black trousers, but not from any specified retailer) as a requirement of their employment, and where the costs incurred by the workers vary, an employer may consider providing a reasonable limit for workers to spend on uniform that will be reimbursed. What is a ‘reasonable limit’ will differ on a case by case basis.
If you provide workers with a uniform, any reasonable, additional charges incurred through ordinary wear and tear of the uniform, such as cleaning, laundry or repair charges, will again reduce the workers’ pay for minimum wage purposes.
However, if the worker negligently damages the uniform, loses it or does not return it at the end of their employment, any reasonable charge will not reduce minimum wage pay providing it is a contractual requirement and as a result of the worker’s misconduct.
Apart from in these circumstances, if the worker bears the cost of any replacements throughout their employment it will reduce their minimum wage pay. This might be the case where the uniform becomes worn through reasonable wear and tear over time, or where the worker stores the uniform at work in a designated place provided by you for that purpose and it is stolen or damaged whilst kept there.
Administrative charges and fees
Employers are entitled to make certain deductions which will not reduce a worker’s pay for minimum wage purposes, for example, sums owed to a third party by the worker under an Attachment of Earnings Order. However, any administration charges or fees applied by the employer for handling these transactions will reduce the worker’s pay for minimum wage purposes. These fees or charges are deemed to be for the use and benefit of the employer. This continues to be the case even where you are legally ordered to make the deduction which is to be paid to the third party (such as where there is an attachment of earnings order made by a court).
You may still deduct £1 in connection with an attachment of earnings order if it takes your worker’s pay below their protected earnings rate (this is the amount of money that an employee or a worker has to take home even when subject to a court order; it is separate to minimum wage) but not if it takes their pay below the minimum wage. See Deductions for a priority order.
If the worker was provided to you by an agency or an umbrella company any administrative charge imposed on you is your own liability. (An umbrella company is a company that employs agency contractors who work on temporary contract assignments, usually through a recruitment agency.) You cannot pass on this charge to the worker without reducing the worker’s pay for minimum wage purposes.
Work related fees, registrations, licences and charges for payslips
Some employers need workers to be registered or licensed before they can legally perform their work. This may result in deductions or payments being made.
If you facilitate the cost of the fee which is the purely personal liability of the worker on their behalf to a third party, then the deduction or payment you process will not reduce pay for minimum wage purposes. However, if the obligation to pay a fee is imposed on the worker by the contractual arrangement, then any deduction or payment you process will reduce minimum wage pay as it will be a cost in connection with the worker’s employment.
In these instances what matters is whether the fee, registration or licence is either:
- a pre-requisite placed on the worker to enable them to take up employment in a particular type of work/field
- imposed by the employer to enable the worker to perform the duties of that particular employment
If the charge or fee is required as a pre-requisite of obtaining the employment in the first place, then it will not reduce the worker’s pay for minimum wage purposes. Such charges could, for example, include the cost of Disclosure and Barring Service (DBS) checks.
Example scenario
Some nurses have to register with the Nursing and Midwifery Council before they can work as a nurse in the NHS or private health care sector. There is a fee for registration and payment of the fee is the liability of the worker. Registration is a pre-requisite for securing employment so therefore payment of the fee does not reduce pay for minimum wage purposes.
If the charge or fee is imposed by the employer for that particular role, it will reduce the worker’s pay for minimum wage purposes.
Example scenario
Employers in the meat preparation industry have a legal responsibility to take steps to ensure their workers do not carry specific diseases, such as tuberculosis.
In order to prove this, the employer insists that all staff produce a medical certificate. The cost of this medical check and certificate is incurred in the course of the employment and is an expense. Any deduction or payment to the employer in respect of this amount will reduce the worker’s pay for minimum wage purposes.
Where you impose a handling or administration fee in connection with any licence or registration, or charges for a payslip where a contract of employment is in place, the worker’s pay will be reduced for minimum wage purposes. This is because these amounts are always connected with the employment and imposed by you.
Expenses in connection with the employment
Any deduction from a worker’s pay by you in respect of specific expenses that are actually incurred in connection with their employment will always reduce pay for minimum wage purposes. Where the expense is incurred by the worker making a payment, either to you or a third party, this will reduce pay for minimum wage purposes unless you reimburse the worker. Reimbursements should be made within a reasonable period of time.
An expense includes any requirement imposed on the worker by you – contractually or otherwise.
Personal Protective Equipment (PPE) and other equipment an employer must legally provide
Deductions or unreimbursed payments made by a worker for any Personal Protective Equipment, or any other required equipment, will reduce the worker’s pay for minimum wage purposes.
PPE is any equipment which you are legally obliged to provide to a worker under the PPE at Work Regulations 1992 – for example, safety helmets, gloves and eye protection.
The value of the equipment cannot be regarded as payment for minimum wage purposes, nor does it matter if the worker is allowed to retain the equipment. Any deductions or unreimbursed payments from the worker will still reduce their pay for minimum wage purposes.
Meals
If you provide meals to workers, any deductions for these may reduce a worker’s pay for minimum wage purposes.
Even if the worker asks for, opts in to or agrees to deductions for meals directly from their pay, it may still reduce their pay for minimum wage purposes. The onus here is on you to ensure any deductions do not bring the worker’s pay below minimum wage rates.
If a worker makes a payment for food from a staff canteen and pays for this after they have been paid (i.e. their wages are not being deducted) this would not reduce their pay for minimum wage purposes.
Example scenarios
Example 1
An employer has a contract with the catering company to provide services, and deductions are made from workers’ pay to the catering company. This enables the employer to meet part of their liability to the catering company and counts as a deduction for the employer’s own use and benefit, which will reduce pay for minimum wage purposes.
Example 2
If an employer doesn’t have any liability to the caterer, and just takes deductions for administrative ease at workers’ request to pay over to the caterer, then this would not reduce pay for minimum wage purposes. If the worker paid for their food at the canteen directly (i.e. not via a deduction), then this also would not reduce pay for National Minimum Wage purposes.
Transport payments and deductions for travel to and from work
Where a deduction is made from a worker’s pay for transport, the amount deducted will always reduce the worker’s pay for minimum wage purposes unless it is an amount owed by the worker to a third party (such as to a transport company).
If the liability is to a third party, the worker must be paying their own costs and not simply meeting the employer’s liability to the third party.
If you have contracted the third party to provide transport for workers – then the liability is yours and any deductions will be for your own use and benefit. This will lead to the amount reducing the workers’ pay for minimum wage purposes.
Example scenarios of travel deductions
Example 1
An employer contracts with a third-party bus company to provide a transport to work service for their workers. The employer deducts a transport charge from the worker, which is then paid over to the third party.
The deduction will reduce the worker’s National Minimum Wage pay.
This is because the arrangement is between the employer and the third-party (as the employer is purchasing the service from the third party). The employer is liable to pay the bus company and the deduction from the worker is being used for the employer’s own use and benefit to meet their liability to the bus company.
Whilst the employer may be immediately paying the monies deducted over to the third party, the fact remains that the employer will be free to use the monies for any purposes they so wish and will not need to use their other funds to pay the bus company. This situation applies even if the employer is making a loss in providing the service to the workers.
Example 2
The workers choose to pay a weekly fee to use a home to work bus service provided to them by a third party.
The employer is authorised by the workers to deduct an amount from their pay and pass it directly to the third party on their behalf.
The amount deducted would not reduce the calculation of minimum wage pay, provided that the arrangement is not an expense of the employment, a contractual requirement or any other requirement imposed by the employer on the worker.
This is because the agreement with the third party is the workers’ liability – not the employer’s.
If a worker is required (whether contractually or by any other imposed requirement by you) to make a payment related to transport, this will reduce the worker’s pay for minimum wage purposes.
However, if you enter into a contract with a third party company and offer a transport service to pick up workers and take them to work, where costs can be paid via standing order after workers receive their wage, workers’ pay will not be reduced.
The key factors here are that the payment is not imposed by you, the expenditure is not for transport in connection with the employment and the amount is not deducted from pay.
Example scenarios of travel payments
Example 1
Connor’s contract states that he must pay his employer for home to work transport (perhaps because there is no alternative transport). The payment will reduce pay for minimum wage purposes as it is the result of a contractual requirement.
Example 2
Dami’s contract states that she must bear her own transport costs for getting to and from work. Her employer puts on a bus service. She pays for this weekly, after she has been paid (meaning it is not deducted from her wages). This arrangement does not reduce pay for minimum wage purposes.
Example 3
Jacob must report to one site in the morning and during the course of his working day is required to visit another site ten miles away. The employer provides a train ticket for the journey but requires a payment from the worker to cover the cost. The payment is expenditure in connection with the employment and therefore reduces the worker’s pay for minimum wage purposes.
Example 4
An employer runs a bus service to pick up staff near their homes and take them to work. The workers make a weekly cash payment to the employer for the service. Provided the payment is voluntary and not a contractual or other requirement imposed on the worker by the employer and the expenditure is not for transport in connection with the employment, the payment will not reduce pay for minimum wage purposes.
Example 5
An employer enters into a contract with a bus company to pick up workers and take them to work. The workers pay the employer for the service via a standing order. Provided the payment is not a contractual or other requirement imposed on the worker by the employer and the expenditure is not for transport in connection with the employment, the payment will not reduce pay for minimum wage purposes.
Example 6
An employer runs a bus service to transfer workers from different work sites during the day. The cost is deducted from their pay at the end of the month. This will reduce their pay for National Minimum Wage because the cost is deducted, is imposed on them and is in connection with their employment.
Training costs
Costs associated with training are sometimes deducted from a worker’s pay or paid by workers in a number of ways.
If the training is a requirement of the employment or imposed by you, any charge made – whether a deduction or unreimbursed payment – will always reduce a worker’s pay for minimum wage purposes.
The same applies for any examination costs or assessments undertaken by the worker. If these are in connection with the employment or are required by the employer then any deductions or unreimbursed payments imposed by the employer on the worker will reduce the worker’s pay for minimum wage purposes.
It does not matter whether the deduction is made in the pay reference period where the training or examination took place, or if it is – for instance – deducted from the worker’s final pay upon leaving employment. If the training or associated activity is connected with the employment, the deduction will always reduce pay for minimum wage purposes.
However, if a worker enters into a contract to take a college course which is not a requirement of their employment, but something the worker wishes to undertake entirely voluntarily for their own development, then, provided any deductions are paid by you directly to the third party training provider, the worker’s minimum wage pay will not be reduced. This is the case as the liability is the worker’s, the cost is not in connection with their employment and the deduction is not for your own use and benefit.
Salary sacrifice
A salary sacrifice is a general term used to describe an arrangement where a worker gives up their contractual entitlement to a portion of their salary, in exchange for some form of benefit. Salary sacrifice schemes involve a reduction in pay rather than a deduction from pay. Examples of salary sacrifice schemes can include:
- company cars
- childcare vouchers
- work-related training
- cycle to work schemes
- car parking near the workplace
- additional pension contributions
Where a salary sacrifice is in place, the worker no longer has entitlement to that amount of pay under their contract. Therefore, their pay for minimum wage purposes is reduced accordingly.
Where there is more than one arrangement, each additional salary sacrifice arrangement will further reduce a worker’s pay for minimum wage purposes.
In practice employers describe and label a variety of differing arrangements as ‘salary sacrifice’ including those where deductions are being taken from pay. The position for minimum wage purposes will be based on the actual arrangements themselves and not on the description or labels used.
For example, where an arrangement is a deduction from pay it will be considered under normal ‘deductions from pay and payments by workers’ rules for minimum wage.
Example scenario
An employer provides childcare vouchers as a salary sacrifice.
There is a salary sacrifice arrangement in place and the contract of employment details that the worker earns £16,800 per year and has agreed to sacrifice £1,200, giving a remainder of £15,600.
This means that the worker’s annual pay is reduced by the agreed amount before monthly pay, tax and national insurance deductions are made. Details of the arrangement should be contained as part of the worker’s contract of employment and is likely to be described in associated documentation agreed by the worker/employer.
Saving schemes
Deductions made by employers for savings schemes such as Christmas clubs where the money is held by the employer, will reduce the worker’s pay for minimum wage purposes.
Even if the worker has voluntarily entered into the scheme and may benefit from being in the scheme, pay will still be reduced for minimum wage purposes if the amounts are held by you, to do with as you wish, meaning the deduction is for your own use and benefit.
You should ensure deductions for any saving schemes do not bring a worker below the minimum wage before offering this service to workers, or you should make sure that the money is not for your own use or benefit by ensuring the savings are held on the workers’ behalf by an independent third party or a Trust.
It is unlikely that minimum wage will be underpaid in the pay reference period in which ‘saving scheme’ money which initially reduced the worker’s pay is returned to the worker. For minimum wage purposes the returned savings will be added to any other pay in the pay reference period in which it is returned.
The following deductions by employers or payments by a worker will not reduce a worker’s pay for minimum wage purposes:
- deductions for income tax and National Insurance contributions
- deductions for student loans
- deductions from pay allowed under the worker’s contract which relate to misconduct or a related matter such as negligence, or payment by the worker of a specific penalty or in respect of ‘any other event’ for which the worker is responsible and contractually liable. Where the deduction or payment is not in respect of the worker’s misconduct but for another matter, this matter must have some relationship to the voluntary conduct of the worker. If you amend a worker’s contract (which must be done lawfully) to include a previously omitted entry relating to misconduct – the new entry may only be applied to misconduct events taking place after the amendment was made.
- deductions from pay or payment by the worker because of an advance of wages or on account of an advance under an agreement for a loan
- deductions from pay or payment by the worker for the purchase of shares, other securities or share option, or any share in a partnership
- deduction from pay or payment by the worker to recover an accidental overpayment of wages
- deductions from pay that are not for expenditure connected to the worker’s employment or for your own use and benefit (see below)
- voluntary payments by the worker for the purchase of goods and services from you – for example payments for meals the worker has freely chosen to buy in the staff canteen (however, if you deduct money from the worker’s pay in these circumstances this will reduce minimum wage pay)
- certain deductions from pay and payments by the worker for accommodation if the charge for the accommodation is at or below a certain level. See Benefits in kind and Living accommodation.
Example scenarios
Example 1
Tara works in a shop. She is contractually required to make up any shortfall from her till that is as a result of her negligence. Any deduction to meet the shortfall will not reduce her National Minimum Wage pay.
Example 2
Leonardo is supplied with personal protective equipment free of charge by his employer.
Leonardo’s contract stipulates that this must be returned in good condition (except for wear and tear) at the end of the employment otherwise the worker must bear the cost. Leonardo leaves the employment but does not return the equipment.
The employer deducts an amount from Leonardo’s final pay, based on the value at the end of the employment of the unreturned equipment. Leonardo’s action in not returning the equipment is related to misconduct and therefore the contractual deduction for the equipment does not reduce his National Minimum Wage pay in the final pay reference period.
Example 3
Tariq asks his employer for support in undertaking a Project Management degree.
The employer agrees to fund the degree and provide study leave. The employer makes it a condition of their support that Tariq will repay them the full cost of the course if they leave the business before the course is completed – or to pay part of the cost if they leave within a year of its completion.
Both parties sign an agreement to this effect.
Six months after completing the degree Tariq resigns to take up another job. The employer makes a deduction for part of the cost of the course from their last pay – in accordance with the agreement.
The decision to undertake the degree was a decision made voluntarily by Tariq and was not a requirement of employment. The decision to leave was also made voluntarily by him – so he is responsible for the circumstances leading to the deduction.
This means that Tariq’s minimum wage pay will not be reduced by the deduction.
If the employer had funded training which was a requirement of the employment and deducted the costs of training from Tariq when he chose to leave work, the deduction would reduce NMW pay (regardless of whether a clause was included in Tariq’s contract).
A worker may want you to deduct money from their pay that they are liable to pay to other people – for example, their trade union subscription or pension contribution.
These deductions do not reduce minimum wage pay provided the amounts are not expenditure required in connection with the worker’s employment or for your own use and benefit. See Deductions from pay and payments by workers that reduce minimum wage pay.
Example scenario - Childcare costs (paid to a third party or payments made to employer)
If a worker has childcare costs deducted from pay where the employer pays the deducted amount to a third party (like a nursery) on the worker’s behalf, the worker’s pay will not be reduced for minimum wage purposes. This is because the payment is the worker’s liability and is passed by the employer to the third party.
Additionally, if the worker is employed by the nursery and chooses to make payments directly to their employer for childcare – such as by direct debit or cheque – their minimum wage pay will not be reduced. This is provided the payment is not made in order to comply with a contractual requirement. In this situation, the worker is voluntarily purchasing a service from their employer after the worker has received their pay.
However, if the worker is employed by the nursery, and the nursery makes deductions from the worker’s pay for childcare costs, this will reduce their minimum wage pay.
Benefits in kind
Benefits in kind, except accommodation, do not count towards minimum wage pay. It makes no difference whether the benefits have a monetary value. Neither does it make any difference whether the benefit is taxable or not.
If you offer such benefits to the worker, the value or notional value of the benefits can’t be counted towards minimum wage pay.
Examples of benefits in kind that do not count towards minimum wage pay include:
- meals
- fuel
- car
- employer’s contribution to the worker’s pension fund
- assistance with removals
- medical insurance
- luncheon vouchers
- child-care vouchers
Living accommodation
Living accommodation provided by you to the worker is the only benefit in kind that can count towards a worker’s minimum wage pay, but only to a limited extent as explained below.
For minimum wage purposes, living accommodation has to provide the worker with unrestricted access to accommodation suitable for day to day living.
When you provide living accommodation you might choose to:
- deduct rent from the worker’s pay
- charge a specific amount once the worker has received their pay
- provide living accommodation on an uncharged basis as part of a package
In all these cases, the rules allow only a notional daily amount to count towards minimum wage pay. See Accommodation rates for more information.
Accommodation offset
If an employer provides a worker with free living accommodation a notional daily amount called the accommodation offset is counted towards minimum wage pay.
This offset amount, which is expressed as either a daily or weekly rate, does not reflect market rates or the actual cost of renting the accommodation.
The offset amount has been put in place to discourage employers from trying to recoup the minimum wage paid to workers by charging excessive accommodation charges.
To view the current and historical accommodation offset rates see National Minimum Wage and Living Wage: accommodation.
Accommodation offset rates are set in April each year.
Where you charge the worker for the living accommodation, either by making a deduction from the worker’s pay or by accepting a payment from the worker, the worker’s minimum wage pay will only be reduced if you charge more than the amount of the accommodation offset. By doing this there is a risk it will reduce the worker’s pay below the minimum wage. There are some limited exceptions applying to a Higher Education Institution, Further Education Institution, a 16 to 19 Academy, a local housing authority or a registered social landlord.
The accommodation offset is intended to discourage employers from recouping the minimum wage paid to a worker by levying excessive accommodation charges.
The accommodation offset rate doesn’t seek to reflect the actual cost to you or the actual value of renting accommodation for the worker. Allowing a market rate would not recognise the advantages to you of providing living accommodation. Also, the standard and types of accommodation and, consequently, the market value of accommodation can vary considerably.
Additional charges, utilities, etc.
Any charges the worker is obliged to pay as a condition of being provided with living accommodation, including amounts for gas, electricity, water and provision of furniture, must be regarded as a charge paid in respect of the provision of living accommodation.
Such charges should be taken into account when determining the total charge for living accommodation, and when calculating the minimum wage under the accommodation offset rules.
When is living accommodation provided by the employer?
The accommodation offset provisions apply whenever you provide living accommodation to a worker. You may provide living accommodation in a wide range of circumstances, not merely where you own the property occupied by the worker.
You may offer living accommodation to workers where the employment is in a remote location, or it is unrealistic to expect workers to travel daily due to distances involved.
You will be considered as providing living accommodation in the following circumstances, whether or not the accommodation is provided by you or a third party:
- the accommodation is provided in connection with the worker’s contract of employment
- the worker’s continued employment is dependent upon occupying particular accommodation
- the worker’s occupation of accommodation is dependent on remaining in a particular job
Even where the provision of accommodation by you and the worker’s employment are not dependent upon each other, you may still be considered to be providing living accommodation if one of the following applies:
- you are the worker’s landlord either because you own the property or because you are subletting the property
- you and the landlord are part of the same group of companies or are companies trading in association
- your and the landlord’s businesses have the same owner, or business partners, directors or shareholders in common
- you or an owner, business partner, member, shareholder or director of your business receives a monetary payment and/or some other benefit from the third party acting as landlord to the workers
For the purposes of the accommodation offset rules, third parties will include:
- businesses and companies, which are separate legal entities to you
- individuals including those who are family members of a director, business partner, shareholder, member or owner of the employing business;
- businesses or companies with a director, shareholder, member, owner or business partner who is a family member of a director, shareholder, owner or business partner of the employing business
The accommodation offset will apply whenever you are providing living accommodation, regardless of whether the worker can choose whether or not to occupy the accommodation. Even if the provision of living accommodation is optional, where the worker chooses to accept the offer, the accommodation offset will apply.
Treatment of absences and time work
If a worker is paid solely according to the number of hours they work, the work is time work. When a time worker is absent from work, special rules about the accommodation offset may apply.
These special rules apply when a time worker has been absent from work and the following all apply:
- you are charging for living accommodation by making a deduction from the worker’s pay or accepting payment from the worker
- the time worker has been absent from work for a day or more in a pay reference period, for example because they have been sick or taken holiday
- the worker has been paid at least the minimum wage for the hours for which they have been absent
- the hours the worker actually works are less than they would normally be in the pay reference period because of the absence
- the deduction or charge you make for living accommodation does not increase because of the worker’s absence from work
If the above conditions apply, the deduction or payment for living accommodation has to be adjusted before applying the accommodation offset by:
- multiplying the deduction or payment by the number of hours the worker actually worked
- dividing that total by the total number of hours the worker would have worked, including any hours they actually worked, if they had not been absent
Only the amount of the adjusted deduction or payment which exceeds the accommodation offset will reduce the worker’s minimum wage pay.
Example calculations
(using 2023/2024 minimum wage rates)
Example 1 - Accommodation for a time worker who has not been absent
A 26-year-old time worker is entitled to be paid at the National Living Wage rate (£10.42 per hour). You pay them £450 a week (£11.25 an hour for a 40-hour week). You provide living accommodation 5 days a week and deduct £100 per week from their wages for rent.
To calculate their minimum wage pay:
- Identify the applicable offset: £9.10 x 5 = £45.50
- Subtract the amount charged for living accommodation in excess of the accommodation offset (£100 - £45.50 = £54.50) from the worker’s total pay to calculate their minimum wage pay in a normal week: £450 - £54.50 = £395.50.
- The worker’s hourly rate in a normal week is: £395.50 ÷ 40 = £9.89. The worker is not being paid the National Living Wage rate of £10.42 an hour and is therefore being underpaid.
Example 2 - Absence with no reduction in pay
If the same time worker is absent for 2 days because they are sick and are still paid £450 for the week special rules apply.
- Number of hours normally worked: 40 hours. Number of hours actually worked: 24 hours
- Weekly pay remains: £450. Worker’s pay for the time he actually worked is: 24 x £11.25 = £270
- Rent charged remains: £100. The applicable offset remains: £45.50 (£9.10 x 5)
The amount charged for living accommodation in excess of the accommodation offset does not remain as £54.50. The following adjustment needs to be made:
- Multiply the rent charged by the number of hours the time worker actually worked and divide this by the number of hours they would have worked had they not been absent:
- (£100 x 24) ÷ 40 = £60. This adjusted figure is used in place of the rent actually charged to calculate the amount charged for living accommodation in excess of the accommodation offset: £60 - £45.50 = £14.50.
To calculate the minimum wage pay:
- A time worker’s pay for minimum wage purposes does not include pay they have received for the time when they have been absent from work. The worker’s pay for the time they actually worked is £270.
- Subtract the adjusted figure in excess of the accommodation offset from pay for the time actually worked to calculate minimum wage pay in that week: £270 - £14.50 = £255.50
- The worker’s hourly rate in the week they have been absent is: £255.50 ÷ 24 = £10.65.
The worker is paid more than the National Living Wage rate of £10.42 an hour.
Example 3 - Absence with a reduction in pay
If the worker is not paid for the 2 days they are absent the special rules to adjust the amount of the accommodation charge will not apply.
In these circumstances, the weekly pay is: £11.25 x 24 = £270 and the rent charged is: £100.
To calculate the worker’s minimum wage pay:
- Identify the applicable offset: £9.10 x 5 = £45.50
- Subtract the amount charged for living accommodation in excess of the accommodation offset (£100 - £45.50 = £54.50) from the worker’s pay: £270 - £54.50 = £215.50
- The worker’s hourly rate for the week is: £215.50 ÷ 24 = £8.98.
For minimum wage purposes the worker’s hourly rate is £8.98 per hour despite the worker actually being paid £11.25 per hour. The rent charged in excess of the accommodation offset brings his pay below the National Living Wage rate of £10.42 an hour. You must pay the worker more.