Payroll software: 5 minimum wage checks to run

What to take away

How rate changes and effective dates are applied

Rates change every April, announced in the Budget the previous autumn. The official rate tables on GOV.UK are the only safe source for the current rates and their effective dates, so your software should hold the rate set as dated records, not as a single editable number.

When a rate change lands mid pay period, the new rate applies from the first day it is in force. Software that applies the new rate to the whole period overpays; software that applies the old rate to the whole period underpays. Both are wrong.

Age is the trigger. A worker who turns 18 or 21 during a pay period moves to a new band on their birthday, not at the start of the next period. The rate table shows which bands exist now.

Apprentice rate rules sit below the main bands. The apprentice rate is the same as the 16 to 17 year old rate, and it applies only in defined circumstances. Software that applies it to every apprentice will underpay most of them.

The statutory basis for all of this is the National Minimum Wage Act 1998, which sets the duty to pay at least the minimum. The bands, the apprentice conditions, the salaried hours rules and the accommodation offset are set out in the National Minimum Wage Regulations 2015, made under that Act.

National Living Wage is the name for the top rate, paid to workers aged 21 and over. It is not a separate scheme. It is the highest band in the same table, and it carries the same enforcement.

How payroll software maps rates to age and worker type

Every payroll record needs a date of birth, a worker type and a rate band. If any of those is missing or stale, the calculation is a guess. A guess is an underpayment waiting to be found.

Software usually holds a rate table keyed by band, with an effective date. The pay element on the employee record points at a band. The band points at the rate. Change the band and the rate follows.

That chain breaks in predictable places. A date of birth entered as 01/01/1900 flags nothing until an audit. A worker moved from apprentice to standard rate but left on the old band keeps the lower rate. A worker who turns 21 in week three of a period may be paid the lower rate for the whole period.

Some systems derive the band automatically from date of birth and worker type. Others need the band set by hand. Automatic is safer, but only if the date of birth is right and the worker type is right.

Worker type matters as much as age. A casual worker, an agency worker and a zero hours worker are all entitled to the minimum wage for hours worked. Software that treats them as self employed removes them from the calculation entirely.

Before you trust the mapping, run a manual check of payroll calculations on a sample of workers at each band boundary. Pick anyone within three months of a birthday, and anyone whose contract changed in the last year.

Apprentice rules and the exceptions software must apply

The apprentice minimum wage is not for all apprentices. It applies to apprentices aged under 19, and to apprentices aged 19 or over who are in the first year of their apprenticeship. After the first year, a 19 year old apprentice moves to the standard rate for their age.

A 22 year old apprentice in year two is on the top band, not the apprentice rate. Software that holds a single apprentice flag will underpay them for the rest of their apprenticeship.

Apprenticeship status is not the same as a training contract. Someone on a traineeship, a work placement or a course is not an apprentice for minimum wage purposes unless the arrangement meets the definition in the National Minimum Wage Regulations 2015. The employer must have an apprenticeship agreement and the work must be under that arrangement.

Apprentices aged 19 or over in year one qualify for the apprentice rate even though they are adults. This is the exception most often missed in the other direction: software that keys off age alone will overpay them, which is not an offence but is a cost.

Apprentices must still be paid for all time worked, including training at college if it is part of the apprenticeship and the employer requires it. Unpaid training time is a common source of underpayment claims.

When an apprentice turns 19 during year one, they stay on the apprentice rate until the first anniversary of their start date. The clock runs from the start of the apprenticeship, not from the birthday.

Salaried hours, working time and pay reference periods

A salaried hours worker is paid an annual salary for a set number of basic hours in the year. Retail managers, office staff and many public sector roles sit here. The rules are different from hourly paid work.

The employer must pay the salary in equal instalments, or in a way the regulations allow, and the worker must not work more than the basic hours without extra pay. If the basic hours are exceeded, the excess is paid at the minimum wage rate or more.

Software has to reconcile three things: the annual salary, the basic hours and the pay reference period. If the basic hours are set too high, the effective hourly rate falls below the minimum and the employer is underpaying without noticing.

Pay reference periods matter for all workers. A worker paid monthly has a monthly reference period; a worker paid weekly has a weekly one. The minimum wage is assessed over that period, not over the shift or the day. Software that checks each shift separately will flag false breaches.

Working time rules interact here. The Working Time Regulations 1998 govern rest breaks, maximum weekly hours and night work, and time that counts as working time must be paid if it takes pay below the minimum. Travel between assignments, handover time and compulsory training are the usual traps.

Salaried hours workers can move between salaried and hourly status when their contract changes. The change must be reflected in the software from the correct date, and the reconciliation must restart. A mid year switch handled badly produces both overpayment and underpayment in the same year.

Deductions and salary sacrifice that can breach NMW

The minimum wage is assessed on pay actually received for time worked, not on gross pay before deductions. A deduction that is for the employer's benefit reduces pay for minimum wage purposes. Part II of the Employment Rights Act 1996 governs deductions from wages, and the National Minimum Wage Regulations 2015 set out which deductions reduce pay for minimum wage purposes.

Uniform costs, tools, till shortages and training fees charged to the worker are the classic breaches. If the deduction takes pay below the minimum for the hours worked, the employer has underpaid, even if the contract allows the deduction.

Salary sacrifice is a deduction for this purpose. A worker on a rate close to the minimum who sacrifices pay into a pension, a cycle scheme or a car scheme can fall below the minimum on the reduced figure. Software must test the post sacrifice rate, not the pre sacrifice rate.

Pension contributions under auto-enrolment are different. A worker cannot opt out of the minimum wage, but a genuine employer contribution does not reduce pay. The test is whether the money leaves the worker's pay.

Accommodation offset is the main permitted deduction. It allows a limited daily offset against the minimum wage where the employer provides living accommodation. The offset has its own maximum, published alongside the rates, and software that applies it without that cap will underpay.

Overpayment recovery, advances and loans repaid through payroll are deductions too. If the repayment takes a low paid worker below the minimum in that period, the recovery must be spread or paused. Part II of the Employment Rights Act 1996 covers how pay must be handled through payroll.

Checking software output to avoid underpayment

Software will produce a compliant looking payslip from non compliant inputs. The check is on the inputs and the calculation, not on the output format. These five checks test the edges.

A payroll quality checklist makes this repeatable. The point is not to catch every error once, but to catch the same class of error every period.

Keep the exception report. If HMRC asks how you assured compliance, a dated report showing the checks is the answer. A software vendor's assurance is not.

Enforcement, naming and record keeping duties

HMRC enforces the minimum wage and can inspect records without notice. Employers must keep records showing that workers were paid at least the minimum for at least six years. The records must be in a form HMRC can inspect.

Where underpayment is found, HMRC issues a notice of underpayment requiring repayment to workers plus a penalty. The penalty is a percentage of the arrears, subject to a minimum and a maximum per worker. The employer cannot net the arrears off against other pay.

HMRC publishes a naming list of employers who have underpaid. Naming follows a scheme with a threshold, and employers are given a chance to make representations before publication. The reputational effect is the part employers remember.

Naming is not limited to small employers. Large retailers, care providers and hospitality groups have appeared on the list, usually for deductions, unpaid working time or apprentice errors rather than for a wrong headline rate.

Directors can be liable in some cases, and the Employment Rights Act 1996 and later employment legislation give workers a route to an employment tribunal for unauthorised deductions. A worker can also complain to HMRC, which must investigate.

Record keeping covers hours as well as pay. If you cannot show the hours worked, you cannot show the rate. Time recording, rota data and clock in records are part of the payroll evidence, and they must survive a software migration.

When you change systems, the rate history, the worker type flags and the hours records must move with the payroll. If they do not, the first audit after the change will be the expensive one. Run checks to run before choosing any replacement, and test the migration with a parallel run before you switch off the old system.

Common questions