For many businesses, a National Minimum Wage (NMW) compliance letter from HMRC comes as a shock — particularly where staff are salaried and appear comfortably above minimum wage. Yet NMW enforcement is no longer focused solely on low-paid or hourly workers.
With increased HMRC activity, regulatory changes ahead, and retrospective investigations covering up to six years, NMW compliance is now a material financial and reputational risk for employers of all sizes.
Why NMW compliance matters more than ever
Several developments have pushed NMW firmly up the compliance agenda:
- Further NMW rate increases coming into effect from April 2026
- The introduction of the Fair Work Agency
- The phasing out of the 18+ age band
- Intensified HMRC compliance activity and targeted reviews
Where underpayments are identified, employers face arrears going back six years, penalties of up to 200% of the underpayment, and potential public naming by the Department for Business and Trade.
The hidden risk: it’s not just low-paid staff
A common misconception is that NMW risk only applies to workers paid close to the statutory minimum. In practice, HMRC frequently identifies breaches affecting salaried employees earning well above NMW.
This typically arises due to:
- Excess hours worked beyond contractual expectations
- Salary sacrifice arrangements
- Incorrect worker categorisation under NMW rules
- Poor or non-existent working time records
In many cases, employers assume compliance because annual salaries “look high enough”, without testing pay against actual hours worked.
Worker categorisation: the foundation of compliance
NMW compliance starts with correctly categorising workers. There are four main categories under the National Minimum Wage Regulations:
- Time work — usually hourly paid workers
- Salaried hours work — employees paid an annual salary for contracted hours
- Output work — pay based on tasks or pieces completed
- Unmeasured work — where hours are not formally recorded
Incorrect categorisation is a major risk area and can result in the wrong compliance method being applied, pay assessed in the wrong reference period, or hours not being captured correctly at all.
Salaried employees: a common compliance trap
Many employers assume that salaried staff working 35–40 hours per week automatically qualify as “salaried hours workers” for NMW purposes. But this is not always the case.
The regulations impose strict qualifying conditions, and changes introduced from April 2020 (with transitional provisions up to April 2022) mean historical categorisations may now be invalid.
During an HMRC review, it is not unusual for an employee to be treated as unmeasured work in earlier years, before being re-categorised later, significantly complicating calculations. For employers, this creates exposure across multiple periods using different NMW methodologies.
Excess hours: where calculations often fail
One of the most common failings identified by HMRC relates to excess hours worked by salaried employees. Even where a worker qualifies as salaried hours work, any hours worked beyond their annual contractual hours must still be paid at least at NMW rates.
This requires:
- Accurate tracking of actual working time
- A defined and communicated calculation year
- Consistent methodology across the workforce
Without this data, employers cannot demonstrate compliance. Remote and hybrid working arrangements have made this issue more pronounced, particularly where working hours are informal or assumed rather than recorded.
Salary sacrifice schemes: high risk, high scrutiny
Salary sacrifice remains a significant NMW risk area. While schemes such as pension contributions or cycle-to-work can be tax-efficient, they reduce cash pay for NMW purposes.
Despite industry pressure, the government confirmed in May 2024 that employees cannot lawfully sacrifice pay below NMW, even by agreement. Employers must therefore assess NMW impact before employees enter into any sacrifice arrangement.
Particular risk arises where:
- Employees participate in multiple sacrifice schemes
- Working hours fluctuate
- Pay is close to NMW thresholds once hours are factored in
Payroll alone is not enough
NMW compliance cannot be assessed purely through payroll outputs. Employers need documented processes to:
- Assess NMW impact before salary sacrifice begins
- Prevent scheme entry where breaches would arise
- Monitor aggregate effects of multiple deductions
- Apply correct NMW calculation periods (52 vs 52.14 vs 52.18 weeks)
Seemingly small technical choices — such as the number of weeks used in annual calculations — have already resulted in large-scale underpayment findings at major UK employers.
A practical compliance checklist for employers
You should review:
- Worker categorisation — and re-assess when roles or working patterns change
- Working time records — particularly for salaried staff
- Pay elements — ensuring only qualifying pay counts toward NMW
- Historical exposure — remembering HMRC can look back six years
- Documentation — decisions, methodologies, and assumptions should be recorded
Acting before HMRC does
Proactive employers should:
- Audit worker categories across the business
- Review how working hours are captured and evidenced
- Assess all salary sacrifice schemes for NMW impact
- Validate calculation methodologies
- Add NMW compliance to their risk register
- Schedule regular reviews rather than waiting for HMRC contact
The bottom line
National Minimum Wage compliance is no longer a narrow payroll issue; it is a governance, financial, and reputational risk that sits squarely within an employer’s compliance framework.
With HMRC focusing heavily on excess hours and salary sacrifice, businesses that rely on assumptions rather than evidence are particularly exposed. Early review, clear processes, and professional advice can significantly reduce risk and avoid costly retrospective corrections.
Please let EBA know if you have any concerns and would like to discuss this further.
