National Minimum Wage and salary sacrifice – what you need to know

Arrangements like pension salary sacrifice, cycle to work schemes and childcare vouchers are often introduced by employers to provide their staff with a cost-effective benefit. However, salary sacrifice involves a change in an employee’s contract that reduces their salary, resulting in lower NIC costs for both employers and employees.

It is this reduced salary that must be considered when establishing whether or not the employee is being paid at least the National Minimum Wage (NMW). As a result, participation in salary sacrifice can lead to employers inadvertently breaching NMW rules.

Example: Pension Salary Sacrifice and National Minimum Wage

Even one-off salary sacrifices can lead to a breach of NMW, even if employees, on the face of it, are paid far more than NMW. 

Consider someone who is categorised as an unmeasured worker paid £50,000 per annum. Many employers would think such employees are low risk for NMW purposes. However, if the employee decides in March that they would like to take advantage of a salary sacrifice scheme in exchange for a lump sum employer pension contribution of £3000, this could cause an inadvertent breach of NMW. 

This employee’s earnings for March before the salary sacrifice are £4,166. Once their salary is reduced by the sacrifice, their earnings are £1,166. This means that there is an underpayment of NMW, based on 23 working days in the month and 7.5 working hours per day.

Even though the employee has requested this, and it helps them to save towards their retirement, the fact that they have been paid less than NMW leads to consequences for their employer – it will be required to make good any underpayments that may have arisen.

Penalties for NMW underpayments

Apart from making good underpayments, there is the issue of penalties to consider. In 2020 the Department for Business and Trade (DBT) issued guidance on the circumstances in which employers will not be issued with penalties for NMW breaches related to salary sacrifice arrangements. Penalties will not be issued where the following conditions are met:

A) All of the underpayment relating to the worker for the pay reference period is attributable to one or more of the following:

• A reduction by the employer of the worker’s pay in accordance with a salary sacrifice scheme, unless the sacrifice is made to comply with a requirement imposed by the employer in connection with the worker’s employment.
• An amount deducted by the employer from the worker’s pay to cover the purchase by the worker of goods or services from their employer, unless the purchase was made to comply with a requirement imposed by the employer.
• An amount deducted by the employer from the worker’s pay under the terms of a savings scheme operated by the employer for the benefit of the worker, and in accordance with which all amounts deducted are subsequently paid or to be paid to the worker.

B) No part of the underpayment when it falls under condition one relates to deductions as respects a worker’s expenditure or as respects living accommodation

C) The worker has consented to the reduction or deduction

D) The worker has received the relevant goods or services, or the benefits envisaged under the relevant salary sacrifice scheme, or the repayment of monies under the relevant savings scheme, in full or in part and, where in part, in full compliance to date with the relevant terms or arrangements.

However, it should be noted that employers that have been convicted of NMW offences, been party to a labour market enforcement undertaking or order, or who have been issued a Notice of Underpayment in the past six years will still suffer penalties even if they meet the conditions listed above.

It is worth noting that the penalty concessions above are not indefinite and can be amended or withdrawn at any time.

Processes and monitoring for NMW compliance

It is important that employers have processes in place to identify at the outset whether the employee can participate in salary sacrifice arrangements without breaching NMW, and that pay is monitored regularly to ensure there is no breach of NMW in the future, when rates increase.

Clearly, the risk of breaching NMW is higher if employers offer a suite of salary sacrifice arrangements to their employees – the aggregate of all salary sacrifices in the pay reference period must be monitored. Employers must also manage employee expectations and make clear that the arrangements are only available where it does not result an infringement of the NMW rules for the employee.

How we can help

It is vital that employers consider whether their salary sacrifice offerings for employees could lead to a breach of NMW. Even if no penalties may be charged, any underpayments must be repaid as soon as possible, and future breaches avoided by the introduction of good monitoring processes to ensure you protect your compliance record with HMRC.

If you have any questions regarding your NMW position and require assistance, please do not hesitate to get in touch.

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