I can’t afford to pay National Minimum Wage or National Living Wage

With the rising cost of living due to high fuel, housing, and food prices, along with incomes staying the same, households earning less money are feeling the pinch a lot. The government is under pressure to increase the wages of those at the bottom of the pay scale by raising both the national living wage and national minimum wage. While this is good news for workers getting a pay rise, it also means that being an employer is getting more expensive.

Higher wages mean employers have to pay more in National Insurance contributions and income tax. They also have to put more money into auto-enrolment pension schemes. This extra financial burden might be too much for some struggling businesses, especially if they’re not ready for these increases. Here’s what you need to know about paying the National Living Wage (NLW) or National Minimum Wage (NMW), and what to do if you can’t afford these costs. 


What is the difference between National Living Wage and National Minimum Wage?

Both of them show the least amount an employee should get paid, but the one that applies depends on how old the person is. The NLW is for people who are 23 and older, and the NMW is for those under 23. In the 2023/24 tax year, the NLW is £10.42 per hour, and it applies to all workers aged 23 and above. 

The rates for the NMW are a bit more complex because they change based on age. Here they are:

  • Aged 21-22 – £10.18 (2023/24 tax year)
  • Aged 18-20 – £7.49 (2023/24 tax year)
  • Aged under 18 – £5.28 (2023/24 tax year)
  • Apprentices 16-18 (or first-year apprentices aged 19+) – £5.28 (2023/24 tax year)


How are pensions affected?

As you pay into auto-enrolment pension schemes based on a percentage of the earnings that qualify, if you give your employee a higher salary, you’ll also have to put more money into their pension.

In April 2019, the levels of pension contributions went up to 8% of qualifying earnings. Even though employees have to pay 5% of this amount, employers are responsible for the remaining 3%.


Do I have to pay National Living or National Minimum Wage?

Absolutely. These are the lowest rates mandated by law that you must pay to every employee, regardless of their working hours, time on the job, or contract length. Not paying employees in line with these rates is illegal.

It’s important not to mix up the National Living Wage with the ‘UK living wage’. The UK living wage is a voluntary initiative by the Living Wage Foundation, urging employers to pay their staff more than the current National Living Wage. This is not obligatory, but some major employers have chosen to follow these suggested pay rates.


What happens if I can’t pay National Living or National Minimum Wage?

Not paying employees the right amount under either the National Minimum Wage or the National Living Wage, depending on which one applies to them, is a criminal offence. If you don’t meet your responsibilities in properly paying your employees, HMRC can give you a big fine once they find out. Besides having to pay back all the money you owe your staff, you could also face an extra penalty, which might be up to twice the amount you’ve been found to have underpaid.


What should I do if I cannot afford to pay the National Living or National Minimum Wage?

If your company’s money is stretched so thin that you can’t pay your employees the proper wage anymore, you have to act quickly. Not being able to pay wages usually shows there are bigger money problems that need sorting out fast. Get in touch with an insolvency practitioner as soon as you can and tell them about the money troubles your company is facing.


Consider potential financing options

Often, the problem of not being able to pay staff properly is linked to issues with cash flow in a company. An insolvency practitioner can look into your situation more closely and suggest options for you. One option is invoice financing, which includes things like factoring and discounting. This might help with your cash flow concerns. With invoice financing, you get a percentage of the money from your unpaid invoices as soon as you send them to customers. This can bring some certainty when you’re planning your cash flow for the next few weeks and months, including paying your staff. Even though there’s a cost for this service, for some businesses, the ability to plan ahead is worth the expense. 

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Formal insolvency procedures

If your company can’t meet the NLW and NMW rules because of more serious issues, you might have to think about whether a formal liquidation process could be the best way to deal with your problems. There are different corporate insolvency procedures available, and not all of them mean your company has to shut down.

I. Rescue and recovery

Actions like CVAs (Company Voluntary Arrangements) and company administration are taken to try and steady and save a struggling company by reorganizing debts and renegotiating long-term obligations. This can quickly reduce costs, making the company’s money situation better both now and in the future. However, for such a process to be an option, the business must be worth saving, and you have to show that your company has a real chance of being successful and making a profit in the future.


II. Company liquidation

If your business is struggling to meet its obligations, including paying legal minimum salaries, there comes a point when considering closure methods is the only choice left. For an insolvent business, this usually involves a Creditors’ Voluntary Liquidation (CVL). Once it’s decided that a CVL is the best way to go, the appointed insolvency practitioner will start the process of putting the company into liquidation. This involves dealing with creditors, selling assets, and distributing the money accordingly. By the end of the process, the company will no longer exist, and any outstanding debts will be written off (unless personally guaranteed).

If you’re having difficulty paying your staff the National Living or National Minimum Wage, get in touch with Vanguard Insolvency today. You can set up a free, no-obligation meeting with one of our licensed insolvency practitioners. They’ll look at your financial situation and give you advice on what to do next.

Senior Partner at Vanguard Insolvency Practitioners | Website | + posts

I am an insolvency professional with a distinguished career specialising in commercial insolvency, adeptly navigating Creditors Voluntary Liquidation, Company Voluntary Arrangements, and Company Administrations. With a comprehensive understanding of insolvency laws and an unwavering commitment to ethical practices.