UK National Minimum Wage — what business owners need to know

When you’re paying employees, it’s crucial to understand the minimum wage requirements for workers and avoid a penalty from HMRC. Helpfully, as with all UK employee regulations, these are straightforward and easy to understand.

Just kidding.

The UK minimum wage bizarrely refers to two different levels of pay. The National Minimum Wage (NMW), which is for younger workers and some apprentices, and the National Living Wage (NLW), for members of staff aged 21 and over.

The subtle differences between these hourly wage rates can catch organisations off-guard. Our guide will help to clear up the confusion by laying out the latest UK minimum wage (for employees of all ages) and what they mean for employers.

National Minimum Wage rates

All UK minimum wages, including the National Minimum Wage, are updated every April. The new figures are set by the Department for Business on the advice of an independent advisory group, the Low Pay Commission (LPC).

New rates for National Minimum Wage

Since April 1 2024, the National Minimum Wage applies to:

• All workers aged 16 to 20
• Apprentices aged 19 and under
• Apprentices in their first year of training

What is the National Minimum Wage?

To young workers like myself, the idea of not having a standard minimum wage is difficult to comprehend. But the concept is still relatively new to the UK, having first become law in 1998 under Tony Blair’s Labour government.

The policy was aimed at providing greater support for lower-paid workers. Each year, the government is advised at what rate the minimum wage should be set to ensure low-income earners don’t fall into poverty.

Blair celebrated its unveiling in a party speech in 1999, stating: “two million people have had a pay rise because we believe they are worth more than poverty pay”.

At the time, the NMW was set at £3.60 an hour for those aged 22 and older, and £3 for 18-21-year-olds (a rate for 16–17-year-olds wouldn’t be established until 2004).

What is the National Living Wage?

Confusingly, in 2016 the Conservative party renamed the National Minimum Wage bracket for workers aged 23 and over to the rebranded National Living Wage. This rate differs from the NMW in that it is more closely (although not directly) tied to the cost of living.

While the latter increases by a set amount each year, the NLW is supposedly adjusted according to the rate of inflation. That makes it a more accurate measure of how much a person must earn to afford basic living costs in the UK, hence the name.

Read more: How to manage inflation pay rises at your business

New rates for National Living Wage

In April 2024, the new National Living Wage was extended to employees aged 21 and over.

This group now earns at least £11.41 per hour, but this will increase to £12.21 per hour from April 2025.

Here’s how the new Living Wage rates compare to previous years:

Will the new minimum wage cause pressure for businesses?

Many businesses are facing a 10% increase in wage costs, which includes the 6.7% increase in NMW costs. 

What’s more, there’s also the rise in National Insurance contributions for employers, which only adds even more financial strain, particularly for small businesses and small-medium enterprises (SMEs). A survey by the Great British Entrepreneur Awards (GBEA) revealed that 46% of SME owners believe the Autumn budget will make business much more difficult, while 35% say that it will harm the economy. 

As a result, businesses have shared several concerns over the cost implications, which could potentially lead to some being forced to close. Hospitality and retail businesses in particular have expressed their disdain over the latest revelation. 

Members of UKHospitality – the trade body for hospitality businesses in the UK – shared an open letter to Chancellor Rachel Reeves, detailing the damage it would have on their profit margins by having to raise prices by 6-8%.

Moreover, operational changes may need to be carried out, such as restructuring teams, outsourcing functions or reducing hours for staff.

Claire Berry, Employment Solicitor at Price Bailey, commented: “Employers will have to look at their efficiencies and consider where cost savings can be made both in terms of staff costs and in other areas of their business,”

“This may result in redundancies or businesses offering staff reduced hours. Where gaps in the workforce are identified, it may be that businesses opt for part time employees, casual workers or contractors to reduce costs.”

Berry also added that the NMW increase will have a “knock-on effect” for employees expecting a pay rise, as these could be cut back to offset the government’s new measures.

UK minimum wage: legal responsibilities

There is no way to avoid paying the NMW and NLW that doesn’t result in breaking the law. All employers are legally required to pay their employees at least the minimum wage. 

Failure to comply could lead to a penalty of £20,000 fine, so it’s not worth the financial risk for cash-strapped SMEs (not to mention, hugely unethical for employers).

To protect against modern slavery – which remains a big issue in sectors like health and beauty – employers must store records using payroll software to prove they are paying at least the minimum.

This is an important line of defence for business owners. In a dispute at a tribunal or civil court, the burden is on the employer to prove that the minimum has been paid.

Who qualifies for UK minimum wages?

Businesses must pay the minimum wage standard to all employees including freelancers, agency staff, and those on zero-hours contracts. You must also pay trainees and those on probation within your business.

Workers who are not entitled to a UK minimum wage include:

• Volunteers or voluntary workers
• Family and non-family members living with you, such as au pairs and nannies
• Workers younger than the school leaving age (those under 16)
• Work placement students who work with you for up to a year
• Students doing work experience as part of a higher education course
• Friends and neighbours working on an informal basis
• Employees on leave (including sick leave, maternity leave, and paternity leave)

How to afford the National Minimum Wage rise

An Office for National Statistics (ONS) report shows that most large employers already choose to pay staff of all ages the National Living Wage. This can be easier for payroll rather than adjusting thousands of young people’s payslips when they qualify for a higher wage.

SME budgets cannot accommodate this generosity, however. The latest update to the UK’s minimum wage saw pay increase by an average of 13% for workers on the NMW. This adds another £230 per month to the cost of employing a hypothetical, full-time 19-year-old worker.

In an employer survey by Startups, our research revealed that despite the challenges the NMW increase could instigate, 33% of UK businesses plan to increase wages by around 5% in 2025. Amongst those that plan to offer this increase, 36% of businesses plan to reduce costs by streamlining other operations.

In terms of the recruitment process, 47% of those businesses want to hire 51-100 new employees in the new year.

12% of businesses also plan to carry out workplace layoffs to help with growth – a slight decrease from 17% the previous year. However, a further 13% said they would be temporarily suspending pay increases, while the same percentage would temporarily halt company benefits.

How to offset rising labour costs

Company owners should conduct a cash flow analysis to determine how they might offset the new minimum wage. Common cash preservation methods include:

• Raise prices for your service or product
• Diversify income streams
• Lose service offerings that aren’t as profitable
• Speak to staff about reducing work hours, such as going part-time
• Speak to a payroll service expert about potential tax deductions and allowances
• Hire an apprentice. Apprentice workers are still cheaper than a graduate, despite the new NMW rise. This could help to fuel a boom in apprentices this year

It’s tempting to see minimum wage rises as just another layer of red tape designed to snare small business owners. But don’t underestimate the benefits of paying a competitive salary.

Your staff are one of your most important resources and their pay is a direct investment in your company. The above cost-saving measures can help lessen the impact of the change. If you plan accordingly, wage increases can be a bonus for both employer and employee.

Check out our guide to conducting pay reviews to learn more.