National Living Wage, Real Living Wage, National Minimum Wage – what’s the difference?
If you are a small business owner who has employees, then it is important that you understand the difference between the National Living Wage, the Living Wage, as well as the National Minimum Wage. Keep in mind that you will be penalised if you do not pay your employees appropriately but the penalties are just substantial.
In order to provide us with a clear view of the situation, let’s examine these three main terms that are related to wages and explain what each of them means.
What is the National Minimum Wage?
In the UK, the National Minimum Wage (NMW) will largely depend on your age and whether you are working as an apprentice. Typically, the Government will set this up annually based on the suggestions of an independent body also referred to as the Low Pay Commission.
The NMW can be applied to everybody provided that they are over school leaving age notwithstanding their position in the company. However, there are some exemptions wherein NMW cannot be applied. This includes company directors, self-employed people operating their own business, family members of the employer who are currently residing in the employer’s home as well as voluntary workers or volunteers.
The NMW rate for an apprentice is £3.90 starting on April 1, 2019, and £4.15 starting on April 1, 2020. For those who are below 18, their NMW rate is £4.35 from April 1, 2019, and £4.55 from April 1, 2020. If you are between 18 to 20 years old, then your NMW rate will be £6.15 from April 1, 2019, and £6.45 from April 1, 2020. For those adult workers who are between 21 and 24 years old, the NMW rate that will be applied to them is £7.70 starting on April 1, 2019, and £8.20 starting on April 1, 2020. Lastly, for adult workers who are 25 years and above, the appropriate NMW rate for them is £8.21 starting on April 1, 2019, and £8.72 beginning on April 1, 2020.
The NMW rates for apprentices will be applicable to those who are below 19 years old and are working on a Contract of Apprenticeship. It will also apply to apprentices who are 19 or above during the first year of their Apprenticeship.
This rate will be applied to all the time that the apprentice is working as well as all the time that they are training. When this is done, then the apprentice must be paid with the normal NMW rate appropriate for their age.
The government has set a goal for the NLW to obtain two-thirds of median profits. This will be given to workers who are 21 years old and above by 2024, as long as the economic conditions are good. According to the current OBR forecast, it is anticipated that the NLW will be more than £10.50 in 2024.
What is the National Living Wage?
It was in the Summer Budget 2015 when the National Living Wage (NLW) was first launched. It was created by former Chancellor George Osborne and on April 1, 2016, it was turned into a law. Perhaps it’s a little bit confusing but NLW is just the same as NMW but with a different name. It is not associated with the cost of living.
Presently, the NLW has the same level as the NMW. This means that if you are over 25 years old and you are not in the first year of an apprenticeship, then your rate should be £8.72 per hour or more and £8.21 for 2019/20.
No matter what is the terminology that you use, the fact remains that you have to pay your employee who is more than 25 years old and is not a first-year apprentice with a rate of £8.72 per hour starting from April 1, 2020.
What Is The Living Wage?
The Living Wage should not be confused with the National Living Wage which was originated under the Conservatives. The Living Wage is sometimes known as the “Real” Living Wage and its hourly rate is entirely dependent on the basic cost of living in the UK.
The Living Wage Foundation, which is a campaigning organisation in the UK, will be the one that will do the computation. Hence, there is no legal grounding whatsoever. In the UK, the Living Wage is set at a suggested £9.30 per hour. However, in London, the suggested rate is £10.75 per hour. These figures are applicable for the 2019/20 tax year.
The Government will be the one that will compute the NLW and it will be dependent on the proportion of the median level of earnings. On the other hand, the Living Wage is computed separately without the involvement of the Government. Also, this is dependent on the amount that people need to get by.
Since the NLW is dependent on the proportion of earnings then it’s not a surprise that the NLW has a lesser rate than the Living Wage. Although the Government wants to attain two-thirds of median earnings by 2024, there are still a lot of people who thinks that the Living Wage computation is more realistic. This is because this amount is what people require in order to satisfy their basic cost of living including food, rent, and utility bills.
The Living Wage Foundation revealed that the major advantage of giving workers the Living Wage rate is that it can help in reducing absenteeism, boosting employee retention, and improving the quality of their work.
Failure To Pay the NLW, NMW, or Living Wage
Employers are not allowed by the law to pay their workers with a rate less than the NLW or NMW or create false payment records. If they do, then they will have to pay a maximum fine of £20,000 per worker. Also, employers who will not pay will be forbidden from being a company director for a period of up to 15 years.
Whether or not you choose to pay your employees with the Living Wage, keep in mind that if you fail to pay the amount required by the law then you are putting your business in a higher risk.