As payroll professionals, you’re on the frontline of National Minimum Wage (NMW) compliance. With rate increases scheduled for April 2026, the introduction of the fair work agency, the phasing out of the 18+ wage band, and HMRC intensifying compliance reviews, getting NMW right has never been more critical to your role. 

The stakes are high. Employers found underpaying NMW over the previous six years face arrears payments to current and former workers, penalties up to 200% of underpayments, and public naming by the Department for Business and Trade. For payroll teams, this means your processes and controls are under greater scrutiny than ever before. 

The Hidden Danger: It’s Not Just Low-Paid Workers 

A common mistake is focusing NMW compliance efforts solely on workers paid near minimum wage rates. However, HMRC reviews frequently uncover breaches among higher-paid employees. Why? Because factors like salary sacrifice schemes, excess working hours, and incorrect worker categorisation can push even well-compensated employees below NMW thresholds. 

Understanding Worker Categorisation: Your Starting Point 

Before you can calculate NMW compliance correctly, you must categorise each worker appropriately. The four main categories are: 

Time Work: Workers paid hourly must receive at least NMW for each hour worked. This is typically the most straightforward category to manage from a payroll perspective. 

Salaried Hours Work: Workers with an annual salary and contracted basic hours per year. Pay is divided by total hours worked to ensure NMW compliance. This category has specific qualifying criteria under Regulation 21 of the National Minimum Wage Regulations 2015. 

Output Work: Workers paid per piece or task must receive at least NMW based on total hours worked, calculated from pieces produced. 

Unmeasured Work: Workers whose hours aren’t measured or easily measured require pay calculations based on estimated hours worked. 

Incorrect categorisation is a critical risk area. It can result in wrong NMW rates being applied, incorrect recording of hours worked, payments made in wrong pay reference periods, and inadequate compliance tracking processes. 

The Salaried Hours Work Challenge 

Many salaried employees working standard weekly hours (typically 35-40 hours) are assumed to qualify as salaried hours workers. However, they must meet specific criteria outlined in the regulations. Following amendments on 6 April 2020, with transitional provisions applying from April 2022, employers should have reassessed their NMW compliance.

For payroll professionals, this means verifying that historical categorisations remain valid. This is especially important as HMRC investigations span a 6 year period so you may find that an employee could be identified as performing unmeasured work before April 2020, then during the transitional period remain unmeasured for 2 years before being recategorised as salaried work type from 2022 – date. 

The Excess Hours Calculation Trap 

This is where many payroll departments encounter problems. While salaried hours work provides consistent pay regardless of actual hours worked in each pay period, employees who exceed their annual contracted hours must be paid at least NMW for every excess hour. 

The complexity lies in the calculation year. Unless you’ve established and notified a standard calculation year for all workers, you may need to track working time over individual annual periods for each employee, potentially managing up to numerous different "year" definitions based on employment start dates. 

Critical question for your department: Are you tracking actual working time for salaried employees? Without this data, performing excess hours calculations and verifying NMW compliance is impossible. The rise of remote and hybrid working makes accurate time capture even more challenging. 

Salary Sacrifice Schemes: A Major Risk Area 

Salary sacrifice arrangements reduce cash pay in exchange for non-cash benefits like pension contributions, cycle-to-work schemes, or childcare vouchers. While beneficial for tax and National Insurance savings, they create NMW compliance risks. 

Despite a 2018-2020 government consultation that revealed 55 out of 101 respondents were withdrawing or restricting salary sacrifice schemes due to NMW concerns, the government confirmed in May 2024 that no legislative changes would permit workers to accept pay below NMW through such arrangements. 

Your Payroll Process Requirements 

Payroll calculations alone don’t provide the complete compliance picture. You need robust processes to: 

• Assess whether entry into a salary sacrifice scheme creates NMW risk before the arrangement begins 
• Consider the aggregate effect of multiple salary sacrifice schemes for individual workers 
• Prevent workers from joining schemes where breaches would occur, or impose sacrifice limits 
• Adjust benefit-in-kind reporting for tax purposes where necessary 

The calculation period for NMW purposes presents another challenge. Should you use 52, 52.14, 52.18, or 52.2857 weeks in your annual calculations? This seemingly minor detail can significantly impact compliance outcomes, (as many large UK businesses have already discovered). 

Your Compliance Checklist 

As a payroll professional, ensure your processes cover these essential areas: 

Worker Categories: Regularly review and verify categorisations for all employees, not just new starters. Recategorise workers when job roles or working patterns change. 

Rates and Eligibility: Stay updated on rate changes and age-band eligibility. With April 2025 changes approaching, audit your systems now. 

Inclusions and Exclusions: Understand what counts toward NMW (basic pay, certain allowances) and what doesn’t (benefits in kind, tips, premium payments for overtime). Ensure your payroll system correctly classifies all payment elements. 

Record Keeping: Maintain comprehensive records of working time, pay calculations, and categorisation decisions. HMRC can review up to six years of records during investigations. 

Training and Updates: Stay informed about legislative changes and relevant case law. NMW rules evolve, and your knowledge must keep pace. 

Taking Action Now 

Given the complexity of NMW compliance and the severe consequences of breaches, consider these immediate actions: 

1.      Conduct a comprehensive audit of worker categorisations across your organisation 

2.      Review your time-tracking systems, particularly for salaried employees 

3.      Assess all salary sacrifice schemes for NMW impact before employees enrol 

4.      Verify your calculation methodologies, including the annual weeks calculation 

5.      Document your compliance processes and decision-making rationale 

6.      Add NMW compliance to your department’s risk register if it isn’t already there 

7.      Establish regular review cycles rather than waiting for HMRC contact 

The Bottom Line 

National Minimum Wage compliance isn’t just an HR concern, it’s a core payroll responsibility. With heightened HMRC activity focusing on excess hours calculations and salary sacrifice schemes, payroll professionals must move beyond basic rate checks to implement sophisticated monitoring systems. 

The good news is that systematic approaches to worker categorisation, time tracking, and pre-emptive scheme assessments can significantly reduce your compliance risk. Regular reviews, robust processes, and proactive management will protect your organisation from penalties and reputational damage while ensuring fair treatment of all workers. 

Don’t wait for an HMRC investigation to discover gaps in your compliance. Start your review today, seek specialist advice where needed, and position your payroll function as a compliance champion within your organisation.