Salary sacrifice schemes have become increasingly popular, often generated by employer efforts to save secondary National Insurance contributions with employers saving 13.8% in employment on costs.
They have become a popular vehicle for offering various employment related reward strategies with popular use for:
- Pensions
- Cycle to Work Schemes
- Childcare Vouchers (although restricted with no new entrants)
- Holiday exchange
- Low emission vehicles
Some think they operate the same as voluntary deductions, however, they operate through more complex structures of contractual reductions on earnings (the money was never earnt).
The recent National Minimum Wage shaming list information outlines the following for salary sacrifice:
Salary sacrifice – Reductions in pay
Employers and workers often enter into arrangements whereby the worker agrees to a contractual reduction in their pay in exchange for some form of benefit. This is often referred to as a ‘Salary sacrifice’, but this is not a term that is recognised in National Minimum Wage (NMW) legislation. The reduction in pay is a contractual agreement which means that the new, lower amount of pay is what is considered for NMW purposes. Employers and workers cannot enter into an agreement that results in their pay being reduced below the NMW. It is the responsibility of all employers to understand these rules.
Equally salary sacrifice arrangements cannot vary statutory payments even if paid via or partly by the employer. So you cannot contractually reduce by salary sacrifice:
- Statutory Sick Pay (SSP)
- Statutory Maternity Pay (SMP)
- Statutory Adoption Pay (SAP)
- Statutory Paternity Pay (SPP)
- Statutory Parental Bereavement Pay (SPBP)
Does flipping to a deduction work?
Some employers will change a salary sacrifice arrangement to a deduction to avoid breaching minimum pay rules. But does that work? It depends on the individual circumstances and what and why flipping is taking place. In some cases it will not make any difference and a NMW breach will remain.
If an employer provides benefit operated via salary sacrifice and is changed to a deduction instead, then that payment may be considered a payment to and for the benefit of the employer, such deductions also reduce National Minimum Wage pay, so the flipping makes no difference.
Salary Sacrifice and National Minimum Wage
With the significant increase in NMW rates, employers who pay at or close face potential NMW breaches which may be considered criminal.
Over these past few years the NMW rates have increased significantly with the qualifying age for the highest National Living Wage have dropped from 25 to 23 to the new lower age from 1st April 2024 of age 21.
In practice employers describe and label a variety of differing arrangements as ‘salary sacrifice’ including those where deductions are being taken from pay. The position for minimum wage purposes will be based on the actual arrangements themselves and not on the description or labels used.
Salary Sacrifice – often misunderstood
Whether it’s indifference or over complexity, benefit providers, employers and even payroll professionals often don’t understand them.
Hence the reason that a high proportion of employers who are audited for NMW fail and are found to be in breach paying under legal minimum pay levels. in the February 2024 naming round, 183 of the shamed 524 failed due to reductions or deduction payments including salary sacrifice.
Prepare for April 2024- NMW is a cross business challenge
Compliance with National Minimum Wage is. To just a payroll matter.
Complexities can potentially lead to an employer committing a breach, whether deliberate or not, of National Minimum Wage law which can be treated under criminal law.
Do managers fail to record all work time. Do they only count productive time without consideration of preparation and also closure activity?
Is training time paid for. What about travel between work locations. and then what of the impacts of absence and salary sacrifice?
Business practices and employer rules whether central or local all form part of the minimum pay complexities. The problem extends beyond a payroll practice. The whole process of employment practice requires review in identifying risk.
Review salary sacrifice arrangement and flex bens
Many employers operate smart salary exchange arrangements which benefit both employees and employers. Whether pensions, childcare vouchers, bikes or other non-cash benefits, all salary sacrifice arrangements reduce NMW pay.
With this significant rise in NMW rates, some may find that the cushion of pay available to sacrifice has now shrunk and there is insufficient excess earnings to be able to sacrifice, employers need to verify and potentially take mitigating urgent action. The challenge for some is that their arrangement may be mid flight and either needs to be capped or stopped. Flipping to an alternate deduction arrangement may not work as that could be viewed as a deduction for the benefit of the employer resulting g in NMW pay still being reduced resulting in a continued breach.
Reporting breaches is always taken seriously
Employees who have been underpaid can report their employer to the HMRC NMW audit service anonymously. Reports are taken seriously and are investigated at some point by the HMRC NMW audit team.
NMW audits can feel particularly invasive and take significant time and disruption to an employer. Orders to pay underpayment to current and former employees and workers can be applied with risks of fines and penalties along with being named and shamed.
The recent naming of 524 employers in February 2024 relates to NMW audits for the years 2015 through 2023.
At Minimum pay risk? Review and act.
Act now, review and take action to reduce your NMW breach risks. Review the whole business process of employment ensuring that all relevant minimum pay work time is being assessed fully and that all relevant payments and anything impacting are assessed.
Breaching minimum pay law can be expensive and impactful on business. Don’t be in a position of being shamed.
PAYadvice.UK 23/2/2023