National Living Wage

The Government has a stated aim to move from a low wage, high taxation and high welfare nation to a nation that is less welfare dependent with lower tax and higher wages.

Work must pay

There is a perception among many that are not in receipt of benefits that the current welfare system provides and easy ride to people not willing to work. It is often said by certain parts of the press that too many people are happy to sit back and receive handouts as the income they receive is too high to motivate them to work.

We are not about to agree or disagree with this stance but it is clear that there is pressure on Government to ensure that it pays to work and this is why they have introduced the National Living Wage (NMW) for workers over 25 years of age.

How much is the National Living Wage?

From April 2016, the National Minimum Wage will increase from £6.70 to £7.20 for workers over 25 years of age, an increase of £910 per annum for a full time worker. The National Minimum Wage will still apply for workers aged 21 to 24.

How will this affect me?

Assuming that you are working through your own limited company the effect will be minimal. As a director, you are considered outside the scope of the National Minimum Wage Act 1998, as your position is treated as an “officer” rather than a “worker” under the terms of the Act.

If however you are working through an umbrella company, like One Click, you will see a change.

Umbrella workers

A compliant umbrella will pay all of its workers under a contract of employment. This means therefore that the NMW legislation does affect umbrella contractors as they are workers under the legislation.

Typically, workers using umbrella companies receive a salary and bonus and this is broken down on their payslip. The payslip will normally show Basic Pay, Bonus and Expenses. (Lets leave out the changes to expenses coming in April). Basic pay is normally expressed as the number of hours worked in the pay period, at NMW. Expenses are normally then paid and anything left from the payment from their agency or client is shown as bonus.

Clearly therefore if the NMW (or should we now say NLW?) increases, the amount of Basic pay will increase.

Assuming that the umbrella company applies the law correctly, they are not permitted to allocate expenses as part of NMW so clearly this will have an impact on the basic pay amount, the amount of tax and NI paid and the amount left over for bonus.

Minimum rates

An umbrella company is obliged to pay expenses on top of NMW and is also obliged to pay Employer’s NI and also charge a margin to cover it’s costs. Any increase in NMW will therefore increase the minimum pay rate that can be accommodated for umbrella working to be viable.

More information

If you would like to know more about the National Living Wage and how it will affect you, please get in touch.

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