Notebook with the words "Minimum Wage" showing, with a calculator and pen next to it
Back to Basics: how deductions are treated for minimum wage purposes

While the concept may seem simple, the National Minimum Wage (NMW) and National Living Wage (NLW) rules are complicated. Getting it right is much more than just paying an hourly rate above NMW or NLW. Employers need to consider what an employee has been paid and take account of their working hours. Our previous article explored what is meant by working hours for NMW and NLW in more detail. 

Deductions from an employee’s pay can impact whether NMW and NLW levels are met. Even for employees who appear to be paid safely above the NMW rates, their pay might not be once deductions are taken into account.  An employer who misses this risks financial penalties and the possibility of being ‘named and shamed’ by HMRC if they do not get things right.

How deductions might affect NMW or NLW

The National Minimum Wage Regulations 2015 set out where deductions from an employee’s pay will reduce their pay when assessing whether NMW or NLW rates have been met. This will normally be if they:

  • relate to expenses connected with the employment; or
  • are made for the employer’s use and benefit.

For expenses connected with the employment, HMRC give examples such as a Disclosure and Barring Service Bureau (DBS) or Disclosure Scotland check or uniforms paid for by the employer and then deducted from the employee’s pay. 

A deduction is treated as being for the employer’s use and benefit if the employer is free to use the money how they wish to. HMRC make clear that it does not matter if the employer makes any profit from the deduction or whether the deduction is made from gross or net pay. It is also irrelevant if the employee has agreed to make the deduction or benefits in some way, such as in return for having the use of a locker in a staff room.

The timing of deductions is also important, as employers need to look at each pay reference period separately. It does not matter if the deduction relates to a different pay reference period – for NMW and NLW purposes the deductions are taken into account in the pay reference period in which they are made.

Special rules for employers providing living accommodation to employees

Where an employee is charged for living accommodation provided by the employer, this can be taken into account depending on whether the employer deducts more than the accommodation offset rates. Since April 2026, these rates are £11.10 per day or £77.70 per week.

Where the charge is at or below the accommodation offset rate, it has no impact on the NMW or NLW calculation. But if the employer charges more than the accommodation offset rate, the difference is taken off the employee’s pay when assessing if NMW and NLW rates have been met.

This contrasts with where the employer provides the accommodation free of charge. In that case, the accommodation offset rate is added to the employee’s pay for the pay reference period.

These rules do not apply where the employer is a local Council, or social housing provider and provides social housing, or where the employer is a Higher or Further Education Institution and the employee is a full time student.

Exceptions to the usual position

Not all deductions will affect NMW and NLW calculations. Where the deduction is for an employee’s personal liability that is paid to a third party, it is not treated as having been deducted from pay for NMW/NLW purposes.

This covers deductions for Income Tax, National Insurance Contributions and Student Loan repayments to HMRC and employee pension contributions. Pension contributions under salary sacrifice arrangements will however still affect an employee’s pay for NMW and NLW.

Other exceptions include contractual deductions for misconduct, the repayment of a loan or advance of wages or the recovery of wages overpaid by mistake.

Further guidance

More detailed information about deductions for NMW and NLW can be found on the HMRC National Minimum Wage manual. For more complex cases, you may wish to consult with a specialist in NMW and NLW, who can advise how the rules apply.

 

This article reflects the position at the date of publication shown above. If you are reading this at a later date you are advised to check that that position has not changed in the time since.   

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