Many employers believe National Minimum Wage (NMW) compliance is simply a matter of paying the correct hourly rate. However, HMRC’s latest enforcement activity continues to demonstrate that even large, well-resourced employers can fall foul of the rules through seemingly minor technical errors.
In the latest list of employers who have been found to have paid employees below the NMW, over 1,100 have been named for errors arising between 2013 and 2025 which affected more than 85,000 workers.
For employers, the consequences extend far beyond repaying arrears. Financial penalties, reputational damage through the public naming regime and significant management time spent responding to NMW investigations can make non-compliance an expensive mistake.
Why NMW compliance remains a high-risk area
While many businesses assume compliance is straightforward, HMRC investigations continue to identify widespread underpayments, often arising from technical errors rather than deliberate non-compliance. Herein lies the biggest risk: businesses misunderstanding the complexity of NMW compliance.
Many compliance failures arise because employers do not appreciate that certain deductions, working practices, or pay arrangements can reduce pay for NMW purposes, even where employees appear to receive an hourly rate above the statutory minimum.
Common causes of NMW failures
HMRC investigations repeatedly identify a number of recurring risk areas. Employers should pay particular attention to the following:
1. Salary Sacrifice Arrangements
Where an employee sacrifices salary in exchange for a benefit, the sacrificed amount reduces pay for NMW purposes.
This is true both for arrangements involving employee pension contributions and for schemes that employees enter into voluntarily, such as car and technology schemes. An employee whose pay is close to the NMW may inadvertently fall below the threshold after entering into a salary sacrifice arrangement. This is particularly relevant as rising employment costs bring more employees closer to minimum wage thresholds. A salary sacrifice arrangement that was compliant previously may become problematic following annual NMW increases.
2. Uniforms, Dress Codes and Required Equipment
Anything that you require your employees to purchase, for which you do not reimburse them, has the potential to be treated as a reduction in pay for NMW purposes. This includes work uniforms, PPE, tools, safety footwear and even clothing required by your dress policy.
3. Unpaid Working Time
Working time is often one of the most heavily scrutinised aspects of an HMRC investigation because employers may not accurately capture all time spent undertaking duties for the business.
Workers should be paid at least the NMW for every minute that they are working or undertaking a task required by their employer. Even small amounts of unpaid time can reduce the rate employees receive to below the NMW level.
Employers commonly overlook the time employees spend:
- Opening or closing premises
- Undergoing security checks
- Completing handovers between shifts
- Completing mandatory training
- Travelling between assignments
- Logging into systems
- Attending meetings
4. Apprentice Pay Errors
Paying the NMW apprentice rate for more than one year, paying it to non-apprentices, and applying the wrong age-related rate after the apprentice rate ceases to apply are all common errors employers can make in relation to apprentices.
5. Failure to Apply Rate Increases
NMW rates increase at the start of each tax year. Failing to increase employees’ pay from 6 April each year, as well as failing to increase an employee’s rate when they move through one of the age thresholds, are common issues that lead to underpayments.
HMRC's current approach to NMW compliance
Historically, HMRC has enforced NMW compliance on behalf of the Department for Business and Trade. However, from April 2026, responsibility for NMW compliance sits with the newly created Fair Work Agency (FWA), while enforcement remains with HMRC.
HMRC has increasingly adopted proactive interventions, including targeted employer campaigns and geographic compliance programmes involving the large-scale distribution of nudge letters. With the additional resources and focus of the FWA, HMRC has significantly increased its activity around NMW compliance. We expect this trend towards increased compliance activity to continue, as the escalator effect of NMW increases will bring more employees into the “danger-pay zone” (pay just above the NMW level), where most issues occur.
Where non-compliance is identified, employers may face:
- Repayment of arrears
- Arrears recalculated using current NMW rates
- Financial penalties of up to 200% of the arrears identified (subject to statutory limits)
- Public naming and shaming under the government's naming scheme
How employers can manage NMW risks
Managing NMW risks requires the active involvement of management and an understanding of how the NMW rules apply to the different types of workers employed within the business.
Responsibility for ensuring NMW compliance cannot be delegated to your payroll provider, as they do not have the necessary information or insight into how your business operates to manage this effectively. A robust compliance framework should include:
Annual NMW Health Checks: Undertake detailed reviews at least annually, particularly after the April rate changes.
Review Salary Sacrifice Arrangements: Assess all salary sacrifice schemes and identify employees who may be approaching NMW thresholds.
Audit Working Time Practices: Review all aspects of the business to ensure that management understands and documents whether any employees are required to work beyond their paid hours because of:
- Shift patterns
- Training requirements
- Travel arrangements
- Security procedures
Ensure suitable safeguards are in place to prevent any identified cause for unpaid time.
Review Time-Recording Systems: Many companies maintain inadequate or inaccurate records of time worked. Ensuring that a system is in place to recognise and record all working time properly significantly reduces the risks associated with NMW compliance.
Examine Employee Costs: Identify any expenses or deductions connected with employment that could affect NMW calculations.
Monitor Age and Apprentice Changes; Ensure controls are in place around age-band transitions and apprentice eligibility requirements.
Train Payroll and HR Teams; Many NMW issues arise due to a lack of awareness rather than payroll system failures.
Document Compliance Reviews; Maintaining evidence of regular reviews can significantly assist if HMRC opens an enquiry.
What to do if you receive a nudge letter from HMRC
A nudge letter should be treated as an early warning sign rather than routine correspondence. While it does not necessarily indicate that HMRC has identified a specific issue, it should prompt an immediate review of your NMW position. Importantly, don’t ignore it and assume that you don’t have any NMW issues.
Take time to read the letter so that you understand exactly what HMRC is asking you to do. If anything is unclear, seek clarification from HMRC using the contact information given in the letter. Our recommended actions include:
- Conduct an immediate internal review.
- Quantify any exposure and pay any identified arrears to employees as soon as possible.
- Promptly correct the underlying issues that caused employees to be underpaid.
- Seek specialist professional advice.
Specialist employment tax and NMW advice can help manage both the technical review and interactions with HMRC. Engaging with an advisor as early as possible in the process (ideally before you have any correspondence with HMRC in reply to the nudge letter) will maximise the value the specialist can deliver for you.
We’re here to help
With HMRC and the Fair Work Agency expected to maintain a strong focus on NMW compliance, now is an appropriate time for employers to review their arrangements before issues are identified through an enquiry.
Whether you have received a HMRC nudge letter, are reviewing salary sacrifice arrangements, or simply want reassurance that your controls remain fit for purpose, our employment tax specialists can help you assess risks, identify potential exposures and strengthen your compliance framework.
If you would like to discuss a NMW compliance issue or require assistance following receipt of a HMRC nudge letter, please get in touch with a member of our employment tax team.