Written by Jonathan Munnery, Insolvency & Restructuring Expert | Last updated: 8 July 2025 | Reading time: 4 mins
What are your options if you can’t pay employees National Living Wage or National Minimum Wage?
Employers are facing rising costs across the board as the National Living Wage increases across all age bands, fuelling higher staffing costs. If you can no longer afford to pay wages in line with the National Living Wage or National Minimum Wage, and the associated costs, such as higher tax liabilities and pension contributions, your company could be at the end of the road, unless insolvency help is sought.
Staff are the lifeblood of a business, so without the funds to pay employees and maintain essential employee numbers, the company could be at risk of becoming insolvent.
What is the National Living Wage and National Minimum Wage?
The primary difference between the National Living Wage and the National Minimum Wage is the baseline hourly rate employees are entitled to according to their age. National Living Wage applies to workers aged 21+ and National Minimum Wage applies to workers aged between 18 and 20.
From April 2025, the rates increased to £12.21 (for individuals aged 21 and above), £10 (for individuals aged 18 and 20), and apprentices saw the biggest rate increase to £7.55. The National Living Wage is periodically updated to ensure workers are paid in line with the cost of living.
All employees are legally entitled to either National Minimum Wage or National Living Wage, depending on their age. If you can’t afford to pay staff either the National Living Wage or the National Minimum Wage, the consequences can be serious.
Additional considerations – income tax and pension contributions
As an employer, you are legally required to pay the National Living Wage or National Minimum Wage, in addition to Employers’ National Insurance Contributions and pension contributions. Auto-enrolment pension contributions are directly linked to employee salary, so if one increases, the other increases in tandem.
Following the increase in the National Living Wage, employers will see overall employee-related costs rise. If running your company is no longer feasible as you can’t afford the National Living Wage, seek urgent insolvency advice to avoid penalties.
What happens if I can’t afford to pay National Living Wage or National Minimum Wage?
As an employer, you are responsible for paying employees what they are entitled to - either the National Living Wage or the National Minimum Wage. This is determined by their age, rather than other factors, such as their working schedule or the nature of their work. If you can’t afford to pay employees the rate they are entitled to, you could face a serious penalty of up to 200% of the overdue wages and a maximum fine of £20,000 per employee.
If you can’t raise enough funds to cover staff wages due to cash flow problems, seek urgent advice from a licensed insolvency practitioner. Your company could be at risk of running out of cash and trading while insolvent if professional advice is delayed. You may consider a range of options to get your business back on track, or company liquidation if this is the final straw.
Professional support for employers struggling to pay National Living Wage
If you are struggling to pay employees National Living Wage or National Minimum Wage, turn to a licensed insolvency practitioner for expert advice. They will advise you on how to raise cash or negotiate debts to meet these obligations. If closing your company is the way forward, they will help you do so efficiently.
Company finance – If your company requires a cash injection to cover essential costs, such as staff wages, company finance can provide a much-needed cash boost. The helping hand afforded by company finance can help restore the financial health of your company and reduce the financial burden of wage arrears. Company finance can provide a solution to financially distressed businesses unable to afford staff wages.
Time to Pay Arrangement - If you have HMRC tax arrears, such as PAYE or Employers’ National Insurance Contributions, negotiate a payment plan with HMRC, also known as a Time to Pay (TTP) arrangement. A TTP arrangement provides breathing space to companies by spreading outstanding payments into affordable monthly instalments, typically over 12 months.
Company Voluntary Arrangement (CVA) – If company debts span beyond staff wages or HMRC taxes, consider entering a Company Voluntary Arrangement (CVA) to avoid liquidation. A CVA is a formal payment plan negotiated with creditors that allows you to spread company debts, typically over a three-to-five-year period.
Creditors’ Voluntary Liquidation (CVL) – If the financial health of your company cannot be recovered due to an overwhelming debt burden, a Creditors’ Voluntary Liquidation (CVL) may present a suitable exit route. A CVL is initiated by a licensed insolvency practitioner who will close your company in an orderly fashion after distributing funds to creditors.
How we can help
If your company can no longer afford to pay staff at the National Living Wage or National Minimum Wage or expects to reach this point in the future, get in touch with a licensed insolvency practitioner at UK Liquidators. It’s vital to access professional insolvency advice early to avoid the financial position of your company from worsening and falling into further debt with employees.
We offer a free, confidential consultation to limited company directors, get in touch with a licensed insolvency practitioner at UK Liquidators for expert advice.
