National Minimum Wage and National Living Wage - calculating minimum wage pay
To see whether a worker's pay is in line with the National Minimum Wage or National Living Wage, you must be aware of when a worker is entitled to be paid it and what pay actually counts as minimum wage.
Elements of minimum wage pay must be checked carefully. Wrongly including an element of pay that doesn't count - for example an extra premium for overtime - can result in it appearing you are paying the minimum wage when you are not.
This guide describes when a worker is entitled to be paid the minimum wage. It explains the pay that does and does not count towards the minimum wage and the basic method of calculating whether it has been paid.
What counts as minimum wage pay
When working out minimum wage pay the starting point is the worker's total pay in a pay reference period, see National Minimum Wage and Living Wage pay reference period - ie the pay received by the worker before the deduction of income tax and National Insurance contributions.
Incentive payments count towards minimum wage pay if they relate solely to the performance of a worker and are made as part of an incentive, sales commission, merit or any performance-related pay scheme.
Bonus payments count towards minimum wage pay. For an explanation of how bonuses should be allocated to different pay reference periods, see National Minimum Wage and Living Wage pay reference periods - bonuses.
Pay that doesn't count as minimum wage pay
Total pay for minimum wage purposes excludes payments that are:
- advances of wages
- pension payments
- lump sums on retirement
- redundancy payments
- rewards under staff suggestions schemes
Since 1 October 2009, tips, gratuities, service charges and cover charges no longer count towards minimum wage pay. This is regardless of whether they are paid through your payroll or are given direct to workers by customers. See commission, bonuses, tips and gratuities.
Benefits in kind also do not count towards minimum wage pay (even if they have a monetary value) - but note the special rules for employer provided accommodation. See National Minimum Wage and Living Wage - benefits in kind.
Other amounts reduce the total minimum wage pay:
- money paid by the employer to the worker in respect of tips, gratuities, service charges and cover charges from customers (but see below)
- the premium element of pay for work paid for at a rate higher than the worker's standard pay rate
- allowances other than those linked to performance
- payments to reimburse expenses
- some payments in respect of absences
Pay that does not count towards the minimum wage - overtime and shift rates
Examples of how to calculate minimum wage for overtime and shift rates
You may pay a worker at a higher rate for some of the work they have done during a pay reference period (PRP), for example:
- working overtime
- weekend or night shifts
- working on bank holidays
- working longer than a certain number of hours
If you do, the amount the higher pay rate exceeds the basic rate - called the premium element - does not count towards minimum wage pay.
Calculating the premium element
To calculate the premium element where the same basic rate applies to all the work done by a worker in a PRP:
Step 1: assume that all the hours worked in the PRP have been paid for at only the basic rate.
Step 2: multiply the number of hours worked by the basic rate.
Step 3: subtract the resulting total from the total of pay actually received for the hours worked.
The remainder does not count towards minimum wage pay.
A 25-year old worker works a basic 20 daytime hours at £6.20 an hour. They work an additional five hours at night from Monday to Friday at a premium rate of £7.00 an hour. They also work four hours overtime on Saturday at a premium rate of £8.50 an hour. To calculate their minimum wage you should:
Step 1: Work out the amount they have been paid above their basic rate:
- £7.00 - £6.20 = £0.80 x 5 hours = £4.00 premium for the night work
- £8.50 - £6.20 = £2.30 x 4 hours = £9.20 premium for the Saturday work
Step 2: Work out the minimum wage pay by taking away the premium element from the total pay:
- Total pay £19.30 (20 hours x £6.20 + 5 hours x £7.00 + 4 hours x £8.50) minus the premium element £13.20 (£4.00 + £9.20) = £6.20
- Divide the minimum wage pay by the hours worked £180.00 / 29 = £6.20
This is lower than the National Living Wage rate of £8.72 an hour (which is the rate for 25 years old and over) and so is not compliant with the minimum wage.
A 30-year old worker works 40 hours a week and is paid £224.00 basic pay (equivalent to £6.10 an hour), but also works 8 hours overtime paid at £7.00 an hour. The total pay for the week is £300.
To calculate minimum wage pay:
Step 1: Work out the amount they have been paid above their basic rate (the premium element). £7.00 - £6.10 = £0.90 x 8 hours = £7.20.
Step 2: Takeaway their premium element from their total pay. £300 - £7.20 = £292.80.
Step 3: Divide their minimum wage pay by the hours they worked. £292.80 ÷ 48 = £6.10.
This does not comply with the National Living Wage rate of £8.72 an hour (which is the rate for 25 years old and over) as the worker is entitled to this. You have to pay them more.
Different pay rates for different jobs
If you pay a worker different basic rates for different jobs or different duties - rather than premium rates for the same job - you need to do separate calculations for the hours worked in each job to calculate minimum wage pay.
For example, a worker works part of the day doing semi-skilled work on a machine and is paid £9.00 an hour but helps clean the factory for another part of the day and is paid £6.95 an hour. There is no premium to subtract in this case.
Some employers pay workers special allowances over and above standard pay. For example, if the worker:
- works in dangerous conditions
- works unsocial hours
- performs special duties over and above a worker's normal duties
- is on call for work
These allowances do not count towards minimum wage pay unless you consolidate them into the worker's standard pay or they relate to the worker's performance.
National Minimum Wage and Living Wage pay reference period
The pay reference period is the period you pay a worker for. It is the basis for calculating whether you have paid a worker at least the minimum wage.
You do not have to pay a worker the minimum wage for each individual hour worked - but in general you must pay them the minimum wage on average for all the qualifying time worked in a pay reference period.
A pay reference period is usually the period of time for which a worker's wage is actually paid. For example:
- workers paid daily will have a pay reference period of one day
- workers paid weekly will have a pay reference period of one week
- workers paid monthly will have a pay reference period of one month
For the purposes of the minimum wage a pay reference period cannot be longer than one month. If you pay your workers at intervals more than a month apart, eg quarterly, you still need to make sure that workers receive the minimum wage during each month.
Pay counted during a pay reference period for minimum wage purposes
For minimum wage purposes, the pay allocated to a pay reference period is any pay:
- received during that 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 the current 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 it to them in the next pay reference period the money will still count towards the period they earned it in.
However, if you delay payment by more than one pay reference period you cannot usually count the money towards the period the worker earned it in. Instead it counts towards the period in which it is paid.
Any pay counted in the period the worker earned it in rather than the period you paid it to them must stay transferred. You cannot include it in the pay reference period when the worker received it as well because this would be double counting.
National Minimum Wage and Living Wage pay reference periods - bonuses
Most of an annual bonus received in a pay reference period will count only towards the minimum wage pay received in that period. However, a proportion of the bonus - based on your pay reference periods - can count towards pay received in the previous pay reference period.
For example, if you pay an annual bonus in December and the pay reference period is one 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.
Example calculation: allocating an annual bonus to a pay reference period
You pay a worker £950 for 152 hours work per month - all of which counts as minimum wage pay. You pay them a bonus in December of £500 for work performance in the 12 months ending on 31 December.
You should calculate their rate for January - October separately - none of the £500 bonus can count towards minimum wage pay for these months: £950 ÷ 152 hours = £6.25 per hour.
For the November pay reference period you can use a twelfth of the bonus in their minimum wage pay - the proportion that relates to that pay reference period: £500 ÷ 12 months = £41.67.
The worker's total minimum wage payment for November is: £950 + £41.67 = £991.67.
Therefore, the hourly minimum wage pay for November is: £991.67 ÷ 152 hours = £6.52.
For the December pay reference period you can include the remaining total of the bonus: £500 - £41.67 = £458.33.
So the total minimum wage pay is: £950 + £458.33 = £1,408.33.
Therefore, the hourly minimum wage pay for December is: £1,408.33 ÷ 152 hours = £9.27.
National Minimum Wage and Living Wage pay reference periods - timesheets
Some workers, typically agency workers, record the time they have worked during a pay reference period in timesheets.
Generally, hours recorded in a timesheet will count towards the minimum wage for the pay reference period in which the worker worked the hours. However, for this to apply you must pay the worker for the hours in that pay reference period or the next pay reference period.
If a worker submits their timesheet within the four working days at the end of the pay reference period after they did the work a special rule applies. You have until the end of the next pay reference period to pay the worker. If you do this, you can count the hours in the pay reference period they were worked when calculating the worker's minimum wage pay.
For example, you pay a worker at the end of each month - so they have a monthly pay reference period. To be able to count pay towards the hours recorded on their time sheet as worked in May then you should pay the worker for them in either May or June.
However, if the worker gives you their timesheet two days before the end of June, then to be able to count the pay towards the hours recorded in their May time sheet in that pay reference period you should pay the worker for them in either June or July.
Deductions and payments that reduce minimum wage pay
The following deductions or payments will reduce a worker's National Minimum Wage or National Living Wage pay.
- deductions for your own use or benefit
- deductions or payments from the worker to the employer for expenditure connected with the job - for example tools, uniform or travel costs - however if you refund the worker for these payments the refund counts as minimum wage pay in the pay reference period in which it is made
- payments by a worker to another person for things connected with the job - for example tools or uniform - however if you refund the worker for these payments the refund counts as minimum wage pay in the pay reference period in which it is made
- certain deductions from pay and payments by the worker for accommodation provided - see National Minimum Wage and National Living Wage - benefits in kind and accommodation
You cannot make any of these deductions if making it would drop the worker's pay below the minimum wage rate.
Deductions not connected to a worker's employment or for the employer's benefit
A worker may want you to deduct other sums 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 or benefit.
Deductions and payments that do not reduce minimum wage pay
When you make a deduction from a worker's pay, it will reduce minimum wage pay if it is for expenditure connected with the employment or if it is for your use and benefit.
However the following deductions from workers' pay and payments by workers connected with their employment do not reduce their minimum wage pay:
- deductions of income tax and National Insurance contributions (NICs)
- deductions from pay allowed under the worker's contract which relate to specific misconduct or payment by the worker of a specific penalty
- 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 purchase of shares or securities by the worker
- 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 or benefit - for more information see deductions not connected to a worker's employment or for the employer's own benefit
- 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 - but note a deduction in these circumstances will reduce National Minimum Wage pay
- certain deductions from pay and payments by the worker for accommodation provided
Working hours for minimum wage purposes
The working hours that apply for minimum wage purposes depend on the type of work being performed - whether they are a salaried, time, output or unmeasured worker.
If a worker does different types of work for you or for different employers the rules and calculation of hours apply differently for each type of work that the worker does.
Time and salaried work
The hours of work that count for minimum wage purposes for time and salaried work includes any time when a worker is:
- at the workplace working - excluding the length of their rest breaks and any payment for these
- at work and required to be available for work - it makes no difference whether or not you actually provide work for that time
- required to be available for work either on standby or on-call at or near their workplace - however there is an exception if the worker is permitted to sleep during this time and is provided with sleeping facilities - see minimum wage working hours - sleeping between duties
- time spent travelling on business - see National Minimum Wage and Living Wage - time spent travelling on business
The hours of work that count for minimum wage purposes for output work includes any:
- time spent travelling on business - see National Minimum Wage and Living Wage - time spent travelling on business
- hours specified in a 'fair estimate' agreement or time actually worked
- if the worker works from home, time travelling from home to other work premises
The hours of work that count for minimum wage purposes for unmeasured work includes:
- time spent travelling on business - more information on time spent travelling, see National Minimum Wage and Living Wage - time spent travelling on business
- hours specified in 'daily average' agreement or time actually worked
- if the worker works from home, time travelling from home to other work premises
Example scenarios: worker making themselves available for work
You call a time worker into your factory to help with an urgent order, but the delivery is delayed. While the worker is at the factory and required to be available for work you must pay them at least the minimum wage for the time - even though they cannot do any work.
However, if the worker is at home waiting for you to call them into work you do not have to pay them the minimum wage for the time they are at home. They would only be entitled after they have arrived at work and while they are working.
Minimum wage working hours - sleeping between duties
You may allow workers who are performing time work to sleep at or near their place of work and provide them with sleeping facilities.
They are not entitled to the minimum wage while they are on standby or on call and are asleep or entitled to sleep.
However, you must pay them the minimum wage in respect of any time during which they are awake for working.
You do not have to pay a worker the minimum wage for time when a worker can sleep and is not working. However, if they have to get up and work, the time spent awake when they are getting ready for work and working is time for which the minimum wage.
If you provide sleeping facilities make sure your arrangement clearly sets out when the worker can sleep. If your arrangement does not clearly specify any sleeping time, it is likely you will have to pay the minimum wage for the full time when the worker is at the workplace - including time when they are asleep.
Each case may be different. If you are unsure about the arrangements you have in relation to the minimum wage you can contact the Acas Helpline on 0300 123 1100.
Example scenario: on-site sleeping arrangements
You employ a care assistant (who is doing time work) at a residential care home and give them on-site sleeping accommodation. They are required to work five days per week, 24 hours on-site. They can rest during the hours of 20:00 - 08:00 unless required to care for a resident. While working their 24-hour shift they must remain on the premises.
You must pay the worker at least the minimum wage for the period 08:00 - 20:00 and for any additional time worked in the hours 20:00 - 08:00.
If the worker is required to attend to a resident during their rest time, you must pay them at least the minimum wage for the period they are awake for working purposes - for example this includes time they spend getting dressed to prepare for work. If they are attending to a resident during the night and are awake from 02:00 to 03:00 for this purpose, they are entitled to the minimum wage.
However, if their contract states they are employed five days per week, 24 hours on-site without specifying the periods when they are entitled to sleep, while working a 24-hour shift they must remain on the premises.
The whole of these 120 hours are included in their basic hours. They are entitled to the minimum wage for the whole of the 24 hour shift as they are at work for the whole of the period that they are on site.
National Minimum Wage and Living Wage - time spent travelling on business
Time spent travelling between home and someone's normal place of work and back again does not count as time when the minimum wage is payable.
However, there are some periods of travelling time when the minimum wage must be paid to a time or salaried hours worker. These include time when the worker is:
- required to travel in connection with their work - any rest breaks taken during the time the worker is travelling count as time worked - for example lunch on board a train
- waiting for a train or changing trains or other form of transport - except during rest breaks
- travelling from one work assignment to another - except for rest breaks
- waiting to either collect goods, meet someone in connection with work or start a job
- travelling from work to training venues - travel between their home and the training venue does not count
- time spent training for their work - either at the workplace or somewhere else - this also applies to workers required to undertake training before starting to work for you
Calculating National Minimum Wage and Living Wage arrears
If you did not pay a worker the minimum wage when they were entitled to it, they are entitled to have any arrears repaid according to a formula using current minimum wage rates.
This means workers will be due more arrears than they were originally underpaid if current minimum wage rates are higher than the minimum wage rates that applied at the time of the underpayment.
Minimum wage rate you must use
The current minimum wage rate is the rate for the age band that applied to the worker at the time of the underpayment. For example, a worker who was eligible for the 16 to 17-year-old rate at the time of the underpayment will be now be entitled to be repaid arrears using the current 16 to 17-year-old rate - even if they are now aged 19.
For the current minimum wage rates see National Minimum Wage and National Living Wage rates.
Calculation formula to pay minimum wage arrears
If you need to calculate and pay minimum wage arrears, you should use the following formula:
- underpayment - work out the amount of the original underpayment in the pay reference period
- original minimum wage rate - divide the underpayment by the minimum wage rate which applied at the time of the underpayment
- current minimum wage rate - multiply the figure you get by the current minimum wage rate
In summary the formula is:
Minimum wage arrears = (underpayment ÷ original minimum wage rate) x current minimum wage rate
The worker will be entitled to the higher of either:
- the amount they were actually underpaid
- the amount calculated using the formula
If the current corresponding minimum wage rate is higher than the original rate for the pay reference period in which the worker was underpaid, the arrears will always be higher than the amount originally underpaid.
Changes in minimum wage rates after making arrears calculations
If minimum wage rates change between the date you calculate the arrears and the date that a worker is repaid the arrears, you will need to redo the calculation with the most recent minimum wage rate.
Example calculation for minimum wage arrears
The below example demonstrates how the minimum wage arrears formula can be applied to work out what arrears a worker is entitled to.
It is December 2010. You paid a 45-year-old time worker £200 for 40 hours worked in the pay reference period 1 August 2010 to 7 August 2010.
In December 2010, you realise the worker had been underpaid and you need to calculate minimum wage arrears.
The main minimum wage rates for the relevant periods were:
- £5.80 for the pay reference period 1 August 2010 to 7 August 2010
- £5.93 for pay reference periods starting between 1 October 2010 and 30 September 2011
You need to calculate the worker's arrears by finding the higher of:
- the underpayment, ie the difference between the amount the employer should have paid at the time and the amount actually paid
- the amount calculated using the arrears formula
Step 1: Multiply the correct rate during the underpayment pay reference period by the hours worked: £5.80 x 40 = £232.
Step 2: Take away the amount you paid the worker from the amount they should have been paid in step 1: £232 - £200 = £32 underpayment.
Step 3: Divide the underpayment by the minimum wage rate which applied at the time of the underpayment and multiply by the December 2010 minimum wage rate: (£32 ÷ £5.80) x £5.93 = £32.72.
The worker is entitled to £32.72 in arrears - which is the higher amount from the two calculations.