HMRC is increasing its focus on National Minimum Wage (NMW) compliance, with employers facing greater scrutiny of their payroll processes and working practices.
Price Bailey has seen an increase in clients receiving HMRC compliance letters, with regional compliance activity reportedly moving into the Home Counties. While initial contact from HMRC is not necessarily a formal investigation, potential issues identified during these conversations can lead to more detailed reviews.
For employers, now is a good time to review payroll processes and working practices to ensure they are meeting National Minimum Wage requirements.
What is HMRC looking at?
HMRC compliance enquiries can cover a wide range of areas, meaning that NMW compliance involves more than simply checking whether employees are being paid the correct hourly rate.
Employers may be asked about:
- Business operations and workforce structure
- Employee working patterns
- Pay rates and payroll processes
- Record keeping
- Payroll deductions
- Overtime
- Travel time between work locations
- Apprentices
- Employer-provided accommodation
- Salary sacrifice schemes
- Mandatory training
- Work clothing requirements
These areas can create potential compliance risks even where an employer has no intention of underpaying staff.
Common areas where issues can arise
Some NMW issues are caused unintentionally by everyday working practices.
For example, employees may carry out unpaid work before or after their scheduled shifts, including opening or closing premises. Training completed outside paid working hours and unpaid travel between different work locations can also affect NMW calculations.
Other potential issues include employees covering the cost of work clothing themselves, accommodation arrangements and deductions from pay.
This means employers need to consider the full picture of how employees work and are paid, rather than focusing solely on their headline hourly rate.
Why record keeping matters
Maintaining accurate records is an important part of demonstrating NMW compliance.
Employers should ensure that their payroll and working-time records provide a clear picture of hours worked and pay received, alongside relevant information about deductions and other factors that may affect NMW calculations.
Having appropriate records in place can also make it easier to respond if HMRC raises questions about an employer’s payroll processes.
What should employers do now?
With HMRC increasing its compliance activity, employers should consider reviewing their current payroll and working practices before potential issues become more serious.
This could include checking:
- Whether employees are being paid for all time that counts towards NMW.
- How overtime and additional working hours are recorded and paid.
- Whether travel between work locations is accounted for appropriately.
- Whether deductions or salary sacrifice arrangements affect NMW calculations.
- How apprentices’ pay is being calculated.
- Whether accommodation arrangements have an impact.
- Whether records are complete and up to date.
- Whether employees are required to purchase clothing or other items for work.
A proactive review can help employers identify and address potential problems before they develop into more significant liabilities.
Looking ahead to the Fair Work Agency
The increased focus on NMW compliance also comes ahead of a wider change to employment enforcement.
From April 2027, responsibility for enforcing National Minimum Wage rules is expected to transfer from HMRC to the new Fair Work Agency.
The agency is expected to take a broader approach to employment rights compliance, meaning employers may face increased scrutiny of employment practices beyond NMW alone.
Strong payroll controls, accurate records and clear compliance procedures will therefore become increasingly important for businesses.
Taking action now
National Minimum Wage compliance extends beyond paying employees the correct hourly rate. Working practices, deductions, overtime, travel, salary sacrifice arrangements and record keeping can all affect whether an employer is fully compliant.
With HMRC activity increasing, businesses should take the opportunity to review their current arrangements and address any potential risks proactively.
For employers, taking action now could help prevent compliance issues from becoming more costly or time-consuming in the future.