Last year heralded big changes in employment law, with the Employment Rights Bill introducing sweeping reforms which are set to shake things up over the next couple of years.

In the meantime, one of the biggest changes for 2025 is the hike in the National Minimum Wage and National Living Wage rates in April. As more employees fall near the legal threshold, employers need to be alert to the risk of accidental breaches. 

The rules are complicated but, in short, workers are entitled to be paid no less than the national minimum wage in any pay reference period. The pay reference period is one month, or any shorter period a worker is paid in reference to.

What are the new rates?

On 1 April 2025, the rates will increase as follows.

National Living Wage:

• For 21 year olds upwards, an increase from £11.44 to £12.21. 

National Minimum Wage:

• For 18 to 20 year olds, an increase from £8.60 to £10.00.
• For 16 and 17 year olds and apprentices, an increase from £6.40 to £7.55.

In this article, we refer to these two categories (the National Living Wage and the National Minimum Wage) together as the NMW. As a reminder, the National Living Wage is not the same as the Living Wage (set by the Living Wage Foundation), which is a higher voluntary rate linked to the cost of living.

What challenges do the new rates pose for employers?

Beyond the obvious increase in costs, the new NMW rates pose some particular challenges for employers. 

Finding the redline

Where workers are already identified as sitting on the NMW threshold, implementing the rate increase is relatively straightforward - although of course, it is absolutely crucial that this does not fall through the cracks, and employers must ensure that the annual increase is implemented immediately.

The more complex issue is workers whose basic pay sits just above the new NMW level. Even where headline pay seems to be compliant, a worker’s overall pay package may fall below the legal minimum, particularly once factors such as additional hours worked, salary sacrifice, and any other pay deductions are accounted for. 

Historically, these types of deductions may not have mattered, as more workers were firmly above the NMW redline. However, as the threshold rises, more and more groups of workers will be dragged into the danger zone, increasing the risk of an accidental NMW breach. As a rough guide, salaries under £30,000 should be reviewed, especially if the work involves peak periods without overtime being paid or there is any element of salary sacrifice.

Employers need to be more alert than ever to the common risk areas that can result in accidental NMW underpayment, such as pay deductions, unpaid working time, incorrect apprenticeship rates and incorrect work type. We wrote about practical actions you can take to avoid these risks after last year’s rate rise. These are even more important now that the rates have risen again. 

Thinking strategically

The NMW may pose a strategic challenge for employers, as the rise in rates pushes junior pay upwards. Entry-level roles paid at the new NMW will be closer in salary to managerial roles (where wages will not be adjusted by the new rates). This kind of pay compression can demotivate staff and put pressure on employers to revise their pay structures to maintain fairness and retain employees. As the NMW is only set to increase, it is worth engaging with this challenge at a strategic level now, rather than being caught on the back foot with each NMW increase. 

Navigating the wider landscape 

The 2025 NMW increase arrives at a time of turbulence in the UK employment landscape.  The significant reforms in the Employment Rights Bill are expected to largely take effect in 2026. This will add further pressure to employers trying to manage the NMW increase. In particular, new rights for shift workers will hit businesses which rely on hourly-paid shift work. These are the businesses that are also likely to have been significantly impacted by the higher NMW threshold.

What to expect next

Looking to the future, employers can expect the NMW to keep going up, particularly for those under 21. The government has asked the Low Pay Commission to take steps to narrow the gap between the 18-20 year old rate and the rate for those aged over 21, with the aim of eventually achieving a single adult rate. As a result, the rate increase from 2024 to 2025 for 18-20 year olds was a hefty 16.3% and employers should expect similar big jumps in coming years. 

Enforcement of the NMW is also due to change. The Employment Rights Bill creates a new state enforcement agency, which is likely to be called the “Fair Work Agency”. This new agency will take over NMW enforcement from HMRC’s National Minimum Wage Enforcement Team. Although the underlying NMW enforcement system itself is not expected to change significantly, the Fair Work Agency may well take a different approach to how these powers are used in practice.

National Minimum Wage Audit 

As the danger zone grows, it’s more important than ever to get NMW right from the start. If you identify and remedy a NMW breach before it is identified by HMRC there are no penalties, so it is really worth investing in compliance early. 

If you do not do this, penalties are 200% of the amount you have underpaid (subject to an overall maximum penalty of £30,000 per underpaid worker). 

You can ensure compliance by auditing pay. When investigating NMW compliance, HMRC will interview the parties involved – including staff – to understand what happens in practice rather than simply take documents and policies at face value. As it will then be for the employer to disprove anything HMRC identifies as a possible breach, it’s important for an audit to include staff interviews to build up a full picture. 

This is a process we can support you with, by reviewing main aspects of pay policy, ensuring key areas of compliance are met, and providing support with remedying any breach. If you’re interested in a NMW audit, your usual Lewis Silkin contact can tell you more.