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HMRC internal manual

National Minimum Wage Manual

Issuing notices of underpayment: calculating underpayments & arrears on a notice

Relevant legislation

The legislation that applies to this page is as follows:

  • National Minimum Wage Act 1998, section 19

The amount to enforce on a notice of underpayment

When a NMW Officer decides that a notice of underpayment should be issued (NMWM13030) a worker’s arrears for each underpaid pay reference period will be the higher of either:

  • the amount they have been underpaid as set out at (1) below, or

  • the amount calculated using the formula at (2) below.

The result (less any payments made by the employer to the worker on or after the date of contact) is the amount the worker is still due to be paid by the employer.

 

1. The amount underpaid

For each pay reference period a worker has been paid below national minimum wage rates, their underpayment is the difference between:

  • the amount they should have been paid if they had been paid at national minimum wage rates on time, and

  • the amount they were actually paid for the pay reference period.

The underpayment is’uplifted’ to identify the arrears due to the worker

2. Calculating amounts using the formula

For each pay reference period the formula is:

Amount due= Total amount underpaid X Current NMW rate
     
  Original NMW rate  

 

In this formula:

 

  • “Original NMW rate” is the rate that applied to the worker at the start of the pay reference period they were originally underpaid.

  • Unless the exception below applies, “Current NMW Rate” is the current rate:

 

  • at the date the notice is served, and

  • for the rate band that applies to the worker’s age in the relevant pay reference period.

For example:

  • If the worker was 45 during the pay reference period, use the current main rate (national living wage)

  • If the worker was 17 during the pay reference period use the current 16-17 rate (even if the worker is now over 17).

  • If the worker was 24 during the pay reference period use the current 21–24 rate.

  • If the worker was 25 during the pay reference period use the current main rate (national living wage).

The exception to this rule is when the employer has paid all a worker’s arrears on or after the date of contact and before an increase in national minimum wage rates. In these cases, for the “Current NMW rate” use the rate that applied:

  • at the date the worker’s arrears were all paid in full, and

  • for the rate band that applied to the worker’s age in the relevant pay reference period.

The total underpayment for all workers

A notice of underpayment and its schedule will show the underpayment in each pay reference period for each worker named on the notice (NMWM13250). However, only the total underpayment for all the workers named on the notice in pay reference periods starting on or after 6 April 2009 is used to calculate the penalty (NMWM13220).

The total arrears and amounts outstanding for all workers

The notice of underpayment and its schedule will show the arrears identified for individual workers (less any payments the NMW Officer believes the employer has paid to those workers) and the total arrears outstanding for all the workers (NMWM13250).

 

If the employer fails to pay a worker their full arrears and only pays the underpayment, the balance of the arrears will still be payable (even though the underpayment will be nil).

 

Example 1

Prior to HMRC commencing a review, the employer has recognised he has underpaid his workers.  He has calculated his underpayment without using the formula above so has not paid his workers arrears due from any ‘uplift’.  He is able to demonstrate to HMRC how he has calculated his underpayment and the pay reference periods they refer to (NMWM09010)

In this case the penalty will be based on the underpayment of NIL and will therefore be the minimum penalty for that period. A penalty will still be charged because there are still arrears due.

 

Example 2

Prior to HMRC commencing a review, the employer made a lump sum payment to his workers to cover an underpayment for minimum wage. He is not able to demonstrate how the payment has been calculated or the pay reference periods the lump sum refers to.

In this case the amount the employer has paid to his workers will reduce the amount of arrears due but the penalty will be based on the full underpayment.