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Difference Between the National Minimum Wage and the National Living Wage

Difference Between the National Minimum Wage and the National Living Wage

January 7, 2021

It is no wonder that employees and employers get confused with the terms ‘National Minimum Wage’ and ‘National Living Wage’. Many people think that the two are the same thing. To remove confusion, we’re going to look at the differences between the two as well as the current rates of pay.

Current rates in January 2021

So what is the minimum wage UK? If we look at all three hourly rates, the current rates as of January 2021 are as follows:

  • The National Minimum wage (NMW) – under 25 – £8.20
  • National Living Wage (NLW) – over 25 – £8.72
  • Real Living Wage (voluntary) – £9.50 (£10.85 London)

The NMW and NLW are reviewed by the Government in April of each year.

The National Minimum Wage UK (NMW) – under 25

All workers are entitled legally to this hourly rate – the National Minimum Wage. This applies whether working full or part-time, flexi-time, via an agency, zero-hours contract and even via an apprenticeship scheme. Everyone except the self-employed gets this hourly rate. Amounts of pay vary for different age groups from the age of 16 upwards. Each year the rates are reviewed and increased by the Low Pay Commission. No matter the size of the company that you are working for, they have to pay the NMW. Legally, all employers have to pay the National Minimum Wage, no matter their size or how many employees they have.

National Living Wage UK (NLW) – over 25 

The National Living wage is the highest pay band of the National Minimum Wage and applies to those who are aged 25 or more. From April 2020, workers aged over 25 were awarded the National Living Wage (NLW) OF £8.72 per hour (as opposed to £8.21 in 2019). The NLW was introduced by the Government back in 2016, with their plan being to pay all workers aged over 25 £9.00 per hour by the year 2020. However, the rate was not increased to match the rate recommended by the Living Wage Foundation. The current rate of £8.72 falls short of the goal of £9.00.

Where the confusion creeps in

In 2016, when the budget re-named the National Minimum Wage as the National Living Wage, the confusion began. Although it is referred to as the ‘National Living Wage’, this rate of pay has no connection with the real ‘living wage’. The living wage is a rate set by the Living Wage Foundation and the organisation recommends that this be paid to everyone over the age of 18. The organisation has been campaigning since 2011 to encourage all employers to pay a living wage. Each year it publishes a set figure, calculated based upon living costs. Employers that comply with the proposed rate of pay are accredited, with it currently being paid by 7000 businesses. To comply, they need to pay all employees the living wage, including any regular subcontracted staff.

To date, the campaign has benefited more than 250,000 employees. Rates for 2020/21 were announced in November 2020 with employers having a period of six months to implement.

Deadline for awarding this new voluntary hourly rate is 9th May 2021. The idea of this rate is that it meets with the actual cost of living, helping to improve living standards. To avoid confusion going forward, the Living Wage Foundation now refer to their rate of pay as the ‘real living wage’.


The real living wage and the Covid-19 pandemic


The work done by the Living Wage Foundation has been particularly important during the Covid-19 pandemic. The director of the foundation said: “It’s an incredibly challenging time for us all, but today’s new living wage rates will give a boost to hundreds of thousands of UK workers, including thousands of key and essential workers like cleaners, care workers, and delivery drivers who have kept our economy going. Since the start of the pandemic, employers have continued to sign up to a real living wage. These are the employers that will allow us to recover and rebuild from this crisis.”


What can employees do if they are not being paid the real living wage?


Whilst the real living wage is not compulsory, if your employer has signed up to the scheme and they are accredited, then you should receive the hourly rate of pay designated by the Living Wage Foundation. If this is not the case, employees are encouraged to report under-payments via the Living Wage Foundation’s online whistle-blowing service. The employer will then be at risk of losing their accreditation from the foundation, which can negatively influence their reputation with both employees and clients.


What happens to employers that do not pay the Government designated NLW or NMW?


Unlike the living wage, the Government’s NLW and NMW have to be paid by law. Businesses that do not comply face fines from HMRC. The employer will be issued with a Notice of Underpayment showing the arrears to be paid. The penalty is calculated at 100% of the rate of underpayment with a minimum fine being £100 and a maximum £20,000. If the employer ignores the Notice of Underpayment, enforcement officers will take action.


Brexit and the National Minimum Wage/National Living Wage


Currently, things are very uncertain with no one knowing how Brexit will affect the National Minimum Wage/National Living Wage. However, most agree that the long-term economic outlook is bleak so it is expected that increases over the next few years will be weaker than previous.

Exactly how the rates of pay are affected will be down to the UK Government, although the Low Pay Commission will make recommendations as to hourly rates for the National UK Minimum Wage.


Need more resources relating to wages and salary?

Make use of our website by checking out our salary calculator here to work out your salary take home.

Or check out our blog here to determine the best geographical location for salary.


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