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Are you calculating the National Minimum Wage correctly?

The national minimum wage (NMW) is a prescribed minimum hourly rate of pay which, subject to the worker’s age, is what employers must legally pay to their workers regardless of length of service.

When calculating the NMW you calculate it over the pay reference period, which is the period the worker is paid over.  If workers are paid monthly the pay reference period is monthly, if workers are paid shorter than a month, for example weekly, the pay reference period would be the shorter period e.g. weekly (it cannot be greater than monthly). 

Then whether a worker has received the national minimum wage, it depends on their average hourly rate.  This is calculated by looking at the total remuneration earned over the relevant pay reference period divided by the total number of hours worked over the pay reference period.  Total remuneration includes the following elements:

  • Basic salary (the gross amount, before any deductions such as employee pension contributions or PAYE and National Insurance contributions).
  • Bonus, commission and other incentive payments based on performance (but not any premium paid for overtime or shift work).
  • Piecework payments.
  • Accommodation offset.

There are some elements do not count yet employers mistakenly include them.  The following do not count:

  • Benefits in kind whether or not they have a monetary value with the exception of the accommodation allowance. This includes meals, luncheon vouchers, childcare vouchers, medical insurance, petrol, employer pension contributions and use of a company car.
  • Loans by the employer.
  • Advances of wages.
  • Pension payments from the employer under the employer’s occupational pension scheme (where the employee has reached retirement or as compensation for loss of office).
  • Lump sum payments on retirement.
  • Redundancy payments.
  • Tribunal or settlement awards.
  • Any premium paid for overtime or shift work.

The official calculation for national minimum wage is:

  • Gross pay before deductions for income tax and National Insurance Contributions


  • Payments and deductions that do not count towards the national minimum wage. 

In respect of workers who also earn commission, you can factor in commission earned in that month even though it is not paid until the next month.  For example, if you have a worker who earns commission in February but is not paid until March, when reviewing their February salary you can take into account the commission they will be paid in March because it was earned in the February pay reference period. 

Effectively therefore with any workers who are on bonus/commission etc. you will be calculating on the basis of one month but effectively looking at the month before to see what was earned in that period albeit not paid until the next period.

In order to ensure compliance with the NMW you would be conducting a review each month (as the pay reference period – remember if shorter than a month then the relevant pay reference period e.g. weekly) and if in any month/week (etc) the worker fell below the national minimum, you would need to top up their salary so as not to be in breach of the legislation. 

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