With the significant increases to National Minimum and National Living Wage, a number of questions are being raised by employers on their options with regards to pre-existing salary sacrifice arrangement where the operation of the sacrifice now takes the employees earnings for National Minimum Wage (NMW) below the employees associated hourly NMW rate. For those aged 21 or over that rate has now risen +6.7% to £12.21 per hour. For others the rise levels are even higher.
What is a salary sacrifice arrangement?
A salary sacrifice arrangement is an agreement to reduce an employee’s entitlement to contractual pay, usually in return for a non-cash benefit.
An employer can set up a salary sacrifice arrangement by varying the terms of the employee’s employment contract. The employee needs to agree to the change.
So what’s the issue with minimum pay
A salary sacrifice arrangement must not reduce an employee’s cash earnings below the relevant minimum pay rates. If the earnings relevant to NMW drops below the relevant age related rate because of the salary sacrifice, the employer is in breach of NMW regulations.
Can the employer just apply a deduction instead!
Changing a salary reduction to an after tax and NI deduction is likely to change nothing.
Salary sacrifice is applied to provide an employer benefit. So changing from salary sacrifice to a deduction from pay after tax is likely to be considered a deduction for the benefit of the employer. Those deductions also reduce the minimum pay earnings amounts – it changes very little and the breach is still present.
What if we opt them out of salary sacrifice when earnings are insufficient?
If the employee wants to opt in or out of a salary sacrifice arrangement, there must be an alteration to the contract with each change.
The contractual arrangement must be clear on what the contractual pay and non-cash entitlements are at any given time.
What if there is a flipping agreement!
The challenge with flipping a salary sacrifice to an after tax and NI deduction is complicated.
It may be necessary to change the terms of a salary sacrifice arrangement where a lifestyle change significantly alters an employee’s financial circumstances.
This may include:
- changes to circumstances directly arising as a result of coronavirus (COVID-19)
- marriage
- divorce
- partner becoming redundant or pregnant
Salary sacrifice arrangements can allow opting in or out in the event these types lifestyle changes.
However and as a general rule, if an employer and employee swaps between cash earnings and a non-cash benefit whenever they like, any expected tax and National Insurance contributions advantages under a salary sacrifice arrangement will not apply.
There are exemptions for some types of benefit provisions with salary sacrifice that do not require a lifestyle event, but the list is limited:
- Workplace car parking
- Provision of cycles and cyclist’s safety equipment
- Childcare vouchers
- Workplace nurseries (there are a number of pretend to be workplace schemes that do not work)
- Employer made contributions under a registered pension scheme
What about maternity rights?
There are also implication when employees are in receipt of Statutory Payments during statutory parental leave.
A Statutory Payment, even if part funded by the employer, cannot be sacrificed.
Employees have a protected right to continue to have access to their contractual benefits during their maternity and adoption leave.
Employees on maternity and adoption leave during periods with any associated maternity pay and adoption pay are entitled under Social Security law to continue to receive a full pay employer pension contribution, including any enhanced employer contribution due under a salary sacrifice agreement.
So what option is there for employers?
So if flipping doesn’t work or ruins the advantages of salary sacrifice, what options does the employer have?
The general basis of the operation of salary sacrifice by employers is to save the 15% employers NIC secondary contribution. Some of this saving may need to be called on to cover periods where a salary sacrifice cannot be operated.
This is where employers need to consider within their scheme rules what action is to take place and have that as part of the contractual agreement with their employee.
The employer could consider ending the agreement, however parental leave rights need to be protected to avoid claims of discrimination.
They could continue to provide the associated benefit without any recovery.
The HMRC indicate that an employer has an option to put procedures in place to cap salary sacrifice deduction and ensure NMW rates are maintained.
The recovery period for certain benefit provisions such as bikes may be considered suitable to extend where this doesn’t conflict with statutory parental leave rights.
Final thoughts
With the increasing NMW rates, there is a growing population of individuals who cannot take advantage of Salary sacrifice arrangements. Employers must either prevent agreeing those impacted from joining or review for those where NMW breaches is now likely.
So, can employer prevent a breach of NMW regulations by changing a salary sacrifice to a deduction from pay after the application of tax and National Insurance?
Simply the answer is NO where the deduction is now considered a payment to the employer for provision of an employer provided benefit as that deduction amount may also reduce earnings for NMW purposes – so no NMW breach has been prevented.
With the increasing minimum pay rates, employers are wise to review their salary sacrifice arrangements to assess who can join and if NMW breaches are taking place and consider what action is to be taken.
PAYadvice.UK 24/4/2025 updated