Last year, we saw a number of well-known UK businesses publicly named by the government for failing to comply with National Minimum Wage (NMW) and National Living Wage (NLW) legislation.
Companies including Go Outdoors, British Gas owner Centrica, Holland & Barrett, and Cineworld have all appeared on the list, alongside hundreds of small businesses nationwide. In total, nearly 500 employers were fined more than £10 million for underpaying their team members.
Many organisations have attributed these breaches to “payroll issues” or “technical errors”. But with fines, reputational damage and employee trust at stake, payroll compliance is not something businesses can afford to get wrong.
One of the most common causes of NMW and NLW non-compliance is the incorrect recording of working time.
Employers may unintentionally fail to pay workers for time spent travelling, attending training, working overtime or being on-call, all of which can count as working time under minimum wage rules. When these hours aren’t captured accurately, employees’ effective hourly pay can fall below the legal threshold.
To reduce this risk, businesses should implement reliable time-tracking systems. This could include timesheets for remote or field-based team members, or clock-in and clock-out systems for location-based teams. It’s also important to stay up to date with government guidance on what qualifies as working time, and to clearly communicate expectations to your team members.
Salary deductions are another common pressure point for minimum wage compliance.
Salary sacrifice schemes. such as those for childcare, car leasing or pension contributions, can unintentionally reduce an employee’s take-home pay below the NMW or NLW. Employers are responsible for ensuring that pay after these deductions still meets legal requirements.
The same applies to deductions for uniforms, equipment or other work-related costs. Having a clear understanding of what is being deducted and how it affects hourly pay is essential to avoid breaches.
Accurate employee data plays a crucial role in payroll compliance.
Because NMW and NLW rates are age-dependent, having the correct date of birth for each employee is essential to ensure they are paid the correct rate. Other details such as National Insurance numbers and bank information must also be kept up to date to avoid payroll delays, tax errors and compliance risks.
Worker classification is another key area to watch. Some businesses mistakenly register team members as self-employed when they should legally be classed as employees or workers. Since self-employed individuals are not entitled to the NMW under the National Minimum Wage Act 1998, misclassification can result in significant underpayment liabilities.
Using an automated payroll system helps improve accuracy, flag potential issues early and support compliance with changing legislation. Automation can also prevent common mistakes, such as failing to apply annual minimum wage increases or missing rate changes when employees reach age-related thresholds.
Beyond compliance, automation delivers time-saving benefits by streamlining payroll processes and reducing manual intervention.
Even with automated systems in place, it is best practice to carry out a payroll audit at least once a year.
Regular audits help ensure payroll processes remain accurate, compliant and up to date, as well as prepare businesses in the event of a mandatory PAYE audit by HMRC.
A thorough payroll audit includes:
The findings can then be used to identify weaknesses, implement improvements and reduce the likelihood of costly payroll errors in the future.
Errors in payroll can be expensive. By improving time tracking, understanding deductions, maintaining accurate employee data and investing in automation and regular audits, businesses can significantly reduce the risk of falling foul of NMW and NLW legislation, protecting both their employees and their organisation.
Duncan & Toplis offers payroll services for a range of businesses, including routine processing, BACS payments, auto-enrolment administration and year-end submissions. To find out more, please contact us.
