If, during a NMW inspection, you are unlucky enough to fall foul of the legislation and have been found to have paid a worker below NMW what happens?
1. You will receive a Notice of Underpayment from HMRC
2. You will be required to pay the worker(s) in question the underpayment. The underpayment will be calculated by HMRC and must be paid back at the current NMW rate.
3. You will be charged a penalty. This is calculated as a percentage of the underpayment. From errors relating to pay reference periods starting 1st April 2016 this is calculated at 200% of the underpayment up to a maximum of £20,000 per worker.
4. You have 28 days from the date of service of the notice to lodge an appeal. The will suspend collection of the penalty which would then be reinstated if your appeal with withdrawn or dismissed.
A simple error like using the apprenticeship rate for a worker who does not qualify for this rate could result in costly mistake…
‘Jack Worker’ was working as an electrical apprentice. He was paid £3.90/hr using the apprenticeship rate for 2019-20.
Jack had already completed his first 12 months of his apprenticeship prior to the 2019-20 tax year. He is 22 (over the age of 19) so the apprenticeship rate should not have been used. Jack should have been paid £7.70** per hour.
** This would be higher is the mistake is found post April 2020.
The employer would be required to pay Jack the underpayment.
£7.70-3.90 = £3.80 per hour x 40 hours x 52 weeks = £7,904.
HMRC would then add a 200% fine (up to a maximum of £20,000 per worker) = £15,808. If paid quickly the fine could be reduced to £7,904.
Total cost = up to £23,712.
Audit your own payroll prior to an inspection from HMRC. If you can find an error you can fix it and will negate the risk of the fines. Not sure where to start? We offer a payroll health check service.