Businesses urged to review payroll processes amid tighter minimum wage scrutiny
Employers across the UK should urgently review their payroll processes and employment practices as scrutiny around National Minimum Wage (NMW) compliance intensifies and the enforcement powers of the Fair Work Agency (FWA) begin to take shape.
The latest NMW increases, effective from April 2026, have pushed hourly rates to £12.71 for those aged 21 and over, £10.85 for 18–20-year-olds, and £8 for 16–17-year-olds and qualifying apprentices. At the same time, enforcement is becoming more robust, increasing the likelihood of investigation and the scale of potential exposure.
Complex rules are tripping up employers
From our experience, most employers are trying to comply, but NMW legislation is highly complex and it is often the finer details that create risk.
Issues frequently arise around:
- Working time calculations, including unpaid time on site before or after shifts
- Payroll deductions and voluntary arrangements
- The treatment of expenses and benefits in pay calculations
Even small discrepancies can lead to breaches. For example, failing to include short periods of preparatory time each day can result in underpayment when assessed across a workforce over several years. Similarly, deductions for schemes such as Christmas savings, while well intentioned, can inadvertently reduce pay below the NMW threshold.
The financial and reputational risks are significant
Where breaches occur, the consequences can be severe. Employers may be required to:
- Repay arrears going back up to six years, calculated at current NMW rates
- Pay penalties of up to 200% of the underpayment
- Face public naming by HMRC
There can also be wider cost implications, including additional National Insurance, income tax and pension contributions.
Enforcement is widening under the Fair Work Agency
HMRC continues to enforce NMW on behalf of the FWA, which was established in April 2026 and will, once fully operational, take on a broader remit covering areas such as holiday entitlement and pay, unlawful deductions and agency worker protections.
The FWA will have extensive powers to enter premises, inspect records and payroll systems, and interview staff. It will also be able to issue underpayment notices requiring sums to be repaid within 28 days.
Holiday pay is another growing risk area
Holiday pay calculations are increasingly complex, particularly for businesses with irregular hours or variable pay structures. As enforcement expands, employers should expect the same level of scrutiny in this area as is currently applied to NMW.
The direction of travel is that government policy is making it easier for workers to enforce their rights, and unintended errors are unlikely to be treated leniently.
Actions for employers to undertake
Employers should take proactive steps to strengthen compliance, including:
- Reviewing payroll deductions and salary sacrifice arrangements
- Checking working time calculations in detail
- Ensuring all pay elements are correctly treated for NMW purposes
- Maintaining clear, auditable records of how pay is calculated
Robust record keeping is critical. Employers must be able to demonstrate exactly how they have determined pay and entitlements, particularly if challenged by HMRC or the FWA. Failure to do so can itself carry serious consequences.
Applying robust procedures, controls and carrying out frequent reviews will help businesses mitigate the risk of penalties, avoid costly backdated liabilities and protect their reputation as enforcement becomes more comprehensive.
We’re here to help
Whether you need assistance reviewing complex pay arrangements, creating robust procedures, reviewing current procedures and outcomes, validating holiday pay calculations or improving payroll controls, our Employment Tax, HR Consultancy and Payroll specialists can help ensure your processes remain compliant and efficient.
Get in touch with your usual Azets adviser or contact our team today via the form below.
