Pension salary sacrifice and new national minimum wage rates

The National Minimum and National Living Wage (collectively referred to as “NMW”) rates are increasing from 1 April 2022.

The new rates are included here. At its highest, this is an increase of 11.9% (for Apprentices), and for the National Living Wage, this is an increase of 6.6%.  

Whilst many employers are aware, they need to pay at or above these rates, there are some interactions with Pension Salary Sacrifice (and salary sacrifice generally) that need careful consideration to avoid an inadvertent breach of NMW.

The interaction between Pension Salary Sacrifice and NMW

Pension Salary Sacrifice is a great way to:

  • Reducing the amount of National Insurance Contributions (NIC) payable by both the employer and employee, making pension contributions and saving for retirement more affordable; and
  • Simplify the administration of tax relief for higher rate taxpayers related to many pension schemes in operation.

It is an arrangement used widely by both large and small employers and there is HMRC guidance too on this arrangement. We help many organisation navigate the tax, NIC, payroll, NMW and broader HR interactions and considerations.

However, a lot of the salary sacrifice arrangements were implemented at a time when the rates of NMW were much lower. For those who have previously implemented Pension Salary Sacrifice, when was the last time the Company undertook a review of the scheme to ensure that it is compliant with the most up to date rules and eligibility thresholds have been reviewed?

For example, when was the last time you checked that the NMW controls in place are effective in ensuring the pension salary sacrifice being undertaken by employees will not fall foul of the increased rates of NMW?

Historically, when many Pension Salary Sacrifice arrangements were put in place, a threshold limit for eligibility may have been put in place to ensure those close to or at NMW after any salary sacrifice would not be able to participate.  However, given the increases in NMW over the last five years, an employee salary sacrifice now may mean the employer could breach national minimum wage if the thresholds and eligibility controls have not been reviewed and updated. NMW compliance is much broader than this though – with NMW there are also other considerations, including whether optional work-related expenses are paid for by the employee which can also affect NMW.

Next steps and support available

We have not only been helping clients implement Pension Salary Sacrifice, but we are also able to help review previously designed Pension Salary Sacrifice arrangements which, although compliant with NMW regulations at the time they were implemented, may now fall foul of the new rules and rates if no further eligibility checks or review of thresholds have been undertaken.

This support can help mitigate future risks for the business, especially at a time when HMRC are beginning to increase compliance checks. We are able to incorporate this into a wider discussion about reward review for all staff, including discussions around pay differentials and wage increases for all staff if NMW is increasing.

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