If you make minimum wage what percentage goes to taxes

1. Self-employed individuals pay a FICA withholding amount of 15.3% (2.9% for Medicare and 12.4% for Social Security tax), but they deduct one-half of their FICA tax paid on their federal income taxes. This reduces their FICA contribution to 7.65%.

2. The income ceiling subject to the full FICA withholding rate is $147,000.

3. There is no upper limit to the amount of gross earned income from which Medicare may be withheld.

What are the national minimum wage (NMW) and national living wage (NLW)?

The NMW is an hourly rate set by the Department for Business, Energy & Industrial Strategy (BEIS) and enforced by HM Revenue & Customs (HMRC). There are different rates depending on your age and if you are an apprentice. The NMW means that you should receive at least an amount of pay per hour for the hours worked in your pay period, for example, a week or a month.

The NLW was introduced from 1 April 2016 and is essentially a premium on top of the NMW. Originally it was for workers aged 25 and over who were not in the first year of their apprenticeship. From 1 April 2021, it is for workers aged 23 and over, who are not in the first year of an apprenticeship. While the NLW operates as a higher level of NMW, the same rules apply to both.

Who is entitled to the NMW or NLW?

Almost all employees and ‘workers’ over school leaving age in the UK are entitled to receive the NMW or NLW – this includes full and part-time employees, agency workers, migrant workers and casual workers.

A ‘worker’ is someone who basically undertakes to do or perform personally any work or services. Their contract is not with their own client or customer but with someone else’s business. Their work arrangements tend to be 'midway' between self-employment and employment. You can find more information on GOV.UK.

You should note that even if you are ‘self-employed’ for tax purposes, you may still be entitled to the minimum wage if you fall under the definition of a ‘worker’. We look at the concept of ‘worker’ in our news piece: The curious case of ‘worker’ status and Statutory Sick Pay.

There is an exemption from being paid the minimum wage for certain family members and domestic workers like au pairs or nannies who live as part of someone else’s family. You can read more about the exemption in this HMRC guidance.

In addition, some other types of workers are not entitled to the minimum wage, for example, members of the armed forces, some company directors and ‘office holders’, those on certain Government schemes and voluntary workers if broadly they receive no monetary payments or benefits in kind, other than reimbursement of actual, reasonable expenses. You can find out more about who is not entitled to the minimum wage on GOV.UK.

What are the current rates?

NMW and NLW rates: per hour

You can find the previous years’ rates on GOV.UK.

The NMW and NLW rates are usually amended on 1 April each year.

The minimum wage rules are usually straightforward to understand and apply where you are paid on an hourly basis for the number of hours worked each week or month. The rules are more complex where you are paid an annual salary or are paid per task you perform or piece of work you do (known as ‘piece work’).

For salaried work, the rules say you can be paid a regular and consistent wage, so long as the total number of hours worked over a year are paid at the NMW or NLW on average. For piece work, you must be paid either at least the NMW or NLW for every hour worked or on the basis of a ‘fair rate’ for each task or piece of work you do.

Read more about how to work out the minimum wage using these systems on GOV.UK.

How do I work out if I have been paid the NMW or the NLW?

If you are paid on an hourly basis, the calculation involves taking your ‘minimum wage pay’ and dividing it by the number of hours worked in the pay period. The result should be equal to or above the minimum hourly rate for your age. So, for example, if you are aged 25, the answer should be £9.50 or higher.

Your ‘minimum wage pay’ is the amount of pay you receive, before things like tax, National Insurance and pension contributions have been taken off, but after certain other deductions have been made – including for costs you have incurred in connection with your work that are not reimbursed by your employer (more on this below).

Example

Alan worked 25 hours last week and he earned £237.50. He is 28 and is eligible for the minimum wage rate of £9.50 per hour. £237.50 divided by 25 is £9.50 so Alan has been paid the minimum wage.

The next week Alan works an hour overtime. Even though this is outside his normal pattern, he would need to be paid £247 (£9.50 multiplied by 26).

You should note that you are not usually entitled to be paid the minimum wage for your lunch breaks. There are some useful examples looking at minimum wage and lunch breaks/rest breaks on GOV.UK.

I have just had a birthday and I am entitled to a higher rate, when should the new rate apply?

The rules say that any new rate (that is, for those turning 18, 21 or 23) starts from the beginning of the next pay period. People naturally think that if they are paid calendar monthly and turn 23 (say) on the 15 August, then they should be paid the higher rate for the rest of the month. But actually, they are only entitled to it from the beginning of the following pay period, that is, 1 September.

These same rules apply to apprentices – that is, for those turning 19 and/or for those moving into the second year of their apprenticeship

Can I ever receive less than the NMW or the NLW?

Your employer cannot pay you less than the NMW, or the NLW if you are entitled to it, even if you are willing to accept it.

In particular, you should note that employers must pay their employees at least the NMW or NLW as appropriate, regardless of any additional tips, gratuities or service charges they may obtain as part of their job. (In other words, workers entitled to the NMW/NLW must get at least the NMW/NLW in base pay with any tips being paid on top.)

Additionally, your employer cannot make deductions from your pay in respect of items or expenses that they have provided that are necessary for your employment (such as for a uniform or protective clothes), if these deductions bring down your pay rate below the NMW or NLW.

Similarly, if you incur costs for things connected with the job, which are not reimbursed by your employer, then these will also have the effect of reducing the amount of pay you are taken to have received from your employer. So, even if you have to pay for an item of ‘everyday’ unbranded clothing to wear as part of a uniform, such as a pair of black trousers, black shoes or a white shirt, the cost incurred must be deducted from your pay to establish whether at least the minimum wage is being paid. This is often overlooked by employers.

Example

Jenny (over 23) is paid £9.50 an hour for 40 hours per week. Jenny has earned £380 but then a deduction of £55 is made for a uniform that she has been given, so she only received £325 or the equivalent of £8.12 an hour, which is below the NLW.

You can find an article looking at this rule in the context of fuel costs for staff who have to use their own car for work here.

Workers may opt into things like Christmas Clubs because it helps them save, or because it gives them access to the employer’s goods and services at a discounted price. Nevertheless, we understand that HMRC’s view is that any such deductions made from pay by an employer can reduce the amount the worker is taken to have received, because they are for the employer’s own use and benefit.

If your employer provides you with accommodation as part of the job (including things like electricity, laundry costs, etc.), they can count some of its value towards NMW or NLW pay. Your employer cannot count more than the accommodation offset rate which is in force at any given time.

The maximum offset rate for accommodation is currently £8.70 a day or £60.90 a week. If an employer charges more than this, the difference is taken off your pay that counts towards the NMW or NLW.

Example

Winn, who is 23 years old, is paid £9.75 an hour for 40 hours work (£390 per week). But he stays in the employer’s accommodation and the employer charges him £85 per week for his bed and board. Under the accommodation offset rules, the employer is allowed to consider £60.90 per week as pay for minimum wage purposes. So whilst Dave actually only receives £305 in pay (£390 less £85), he is deemed to receive £365.90 (£305 plus £60.90). However, the deemed amount of wages is less than the minimum wage rate for his 40 hours work, as it only amounts to £9.15 an hour (£365.90 divided by 40), rather than £9.50.

On the other hand, if the accommodation is free, the offset rate is added to your pay.

John, 27, is a carer, and is paid £8.00 per hour for 30 hours work a week, which totals £240. He is given free accommodation 7 days a week, which the law says is worth a notional amount of £60.90. This means John has earned the equivalent of £300.90 (£240 plus £60.90). If we divide this by the number of hours John has worked (30) this brings John’s pay up to £10.03 an hour, which is above the minimum wage rate (for his age) of £9.50.

If you are charged the same as or less than the accommodation offset rate for accommodation, it does not have an effect on your pay.

The accommodation offset rate is amended on 1 April every year.

You can find more information on the accommodation offset rules on GOV.UK.

What are some problem areas?

In addition to tips, deductions and accommodation, there are other complex minimum wage areas to be aware of (some unscrupulous employers may try and use them to their advantage). We look at some of them here:

Training time

Where workers undergo training (for example – employment induction or skills development), the time spent on such activities is working time for minimum wage purposes where a contract of employment has started or where it is a contractual requirement for the worker to attend the training.

However, where prospective workers attend pre-employment induction events to assess their suitability for employment or as part of the job application process, then this would not count as working time and is exempt from the minimum wage rules. You can see what other things count and do not count as working time on GOV.UK.

Travel time and costs

Whilst it is not a requirement under minimum wage law for an employer to make separate payments to workers for their travel time, workers should be paid at least the NMW/NLW rate for all hours worked, including travel time and out of pocket expenses such as vehicle mileage (‘travel’ in this context means travel in connection with work but not travel from home to place of work).

Example

Wali is 35 years old and is paid weekly. Last week she was paid £9.65 per hour for 30 hours work (£289.50). However, Wali spent 3 unpaid hours that week travelling to a business meeting, so the minimum amount to be paid to her should be £9.50 x 33 hours – £313.50. Wali has been paid below the NLW. Her employer needs to top up her pay by at least £24.00 so that the NLW rules are met.

If Wali also incurred £20 of travel costs for those three hours of travelling, her pay would be taken to be £269.50. When we compare this to the bare minimum she should have received, £313.50, she has been underpaid by £44.00.
It is important that care workers in particular, who are often required to travel extensively to visit people in their own homes, try and understand the travel time rules to make sure they are being applied correctly. We look at the minimum wage, tax and tax credit/universal credit rules, as they apply to care workers in a dedicated section of our website.

Interns

Any intern who has a contractual relationship with his employer must be paid at least minimum wage for the hours they have worked. Having set hours, an obligation to fulfil those hours and complete tasks, and individual responsibility for work are all aspects that will be taken into consideration. If an intern is a ‘volunteer’ they will be exempt from NMW/NLW. Volunteers are people who are under no obligation to perform work or carry out instructions. They have no contract or formal arrangement and so can come and go as they please.

If you are an intern, you may find it useful to read the GOV.UK guidance on the NMW and NLW for organisations who offer work experience, including placements and internships.

You can find more information about the NMW and interns on our page: How are interns treated for tax?.

Premium rates of pay

The principle of the minimum wage rules is that a worker’s basic minimum wage pay, before enhancements or other allowances should not fall below the NMW/NLW.

This means that if you are paid at a higher rate than your standard pay rate for some of the work you do – for example for working on weekends or bank holidays, the premium element of pay – that is, the amount the higher pay rate exceeds your basic rate – does not count towards minimum wage pay.

Example

Carrie (aged 19) is paid weekly. Last week she was paid £215 for 31 hours work, which averages £6.93 an hour. On the face of it, £6.93 per hour looks like it meets the applicable NMW rate (£6.83), but actually, eight of the hours were paid at £7 for a Sunday shift, which included an 85p premium per hour.

If we strip out the ‘premium’ amount she received for her Sunday shift (eight hours x 85p premium = £6.80), Carrie’s basic rate works actually works out at £6.72 which is below the minimum wage (£208.20 divided by 31).

Salary sacrifice

Under a salary sacrifice arrangement, an employee is able to swap cash salary for non-cash benefits like pension contributions, cycle to work or childcare vouchers (closed to new recipients from October 2018).

If you are on or just above the minimum wage, then you should not be in a salary sacrifice arrangement. This is because the minimum wage rules essentially mean that a salary sacrifice arrangement cannot reduce your cash earnings below the appropriate minimum wage rate.

If you are slightly higher up the income scale, you should be aware that an increase in the minimum wage rate may affect your ability to salary sacrifice.

Example

Neena, 38, works as a cleaner. She generally works around 35 hours a week at £10.90 an hour. At the moment she can give up £49 of her £381.50 weekly pay packet and get childcare vouchers instead (bringing her cash pay down to £332.50 but still at the minimum wage rate of £9.50 per hour) and saving her tax of £9.80 and NIC of £6.49, a total of £16.29 each week.

If the minimum wage rate for her circumstances goes up to, say £9.80 in April 2023, then assuming Neena still works 35 hours a week and does not have a pay rise, Neena would only be able to sacrifice around £38.50 of her pay for childcare vouchers, as the minimum amount of cash that her employer must pay her is now £343.

Other areas

There is a comprehensive employer guide to calculating the NMW and NLW produced by the BEIS that you may find helpful as it covers other complex topics like salaried workers and sleeping in time. Although it is aimed at employers, employees may find it useful too when trying to understand the rules and self-check their position.

What should I do if I do not receive the NMW or the NLW?

If you think you are not getting the NMW or NLW, you should talk to your employer. Your employer needs to put right any minimum wage underpayment by paying the arrears they owe you (going back up to six years). Our article explains how this should happen.

If that does not work, you can contact a confidential helpline (ACAS Pay and Work Rights Helpline) to help you solve any dispute. You can find the telephone number on GOV.UK.

Complaints can be passed to HMRC (who enforce the minimum wage rules) by ACAS to investigate, as required. Alternatively, you can use an online form to make a complaint directly to HMRC (or take your employer to an Employment Tribunal yourself although there are strict time limits for this).

If HMRC decide that the employer has not paid the minimum wage, the employer will be sent a notice telling them that they must pay you the arrears and they may also be given a penalty.

The arrears will be repaid to you at current rates for all the periods they were underpaid, even if these are higher than the rate that applied when the arrears arose. This is in recognition of loss of purchase power you may have suffered from the initial underpayment.

The way that you work out the amount you should be paid is by using the formula (underpayment/original rate) x current rate.

Example

Jane, who is 38, works out that she was underpaid the minimum wage by £256, by a homecare company that she worked for during the period May to September 2017. During this time, her minimum wage rate was £7.50. However, it is now £9.50. Rather than pay Jane the £256, the homecare provider must pay Jane £324.27 (that is, £256 divided by £7.50 multiplied by £9.50).

When it comes to how the £324.27 should be taxed when it is paid to Jane, ultimately, it should be allocated back to the tax year to which it relates (2017/18) and the tax calculated on it as if it were paid in that year (meaning that if Jane’s total earnings, including the minimum wage arrears, were below the personal allowance, then no income tax would be due).

Even so, the employer will very probably operate Pay As You Earn (PAYE) tax at the time they pay the arrears and in a way that means she will have some tax deducted, so she will need to claim a refund. Jane should contact HMRC National Insurance Contributions and Employer Office at HMRC, BX9 1AS, to arrange a refund, quoting the guidance in HMRC’s PAYE manual.

Please note that the rules are a bit different for National Insurance – it is calculated on the basis of the year the payment is made only: it is not related back to prior years.

Finally, you should be aware that such arrears payments may impact any benefits or tax credits you receive, so it is vital that you tell the relevant authorities about any minimum wage arrears as soon as possible (even if they then go on to disregard the increase in income for whatever reason).

You can find out more on what to do if your employer refuses payment, on GOV.UK.

Where can I get more help?

You can get more help by contacting the ACAS helpline for help in the following employment areas:

• the NMW/NLW
• working in agriculture
• using employment agencies
• working time limits
• using a gangmaster

You can find the telephone number on GOV.UK. The helpline takes calls in over 100 languages.

For further help on the minimum wage, we suggest you look at GOV.UK.

For more technical/in-depth guidance, see HMRC’s National Minimum Wage manual.

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