There is no doubt about it; the forthcoming rise in employer national insurance contributions (NIC), the national minimum wage (NMW), and the national living wage (NLW) will lead to substantial employment cost increases for many employers.
Employers with salary sacrifice arrangements will naturally want to explore additional ways to extract NI savings from them. However, irrespective of this, the compliance risks presented by the rise in the NMW and the NLW should be a priority in respect of those who participate in salary sacrifice schemes.
From April, employer NIC rates are increasing from 13.8% on salaries above £9,100 to 15% on salaries above £5,000. At the same time, the NLW will increase from £11.44 to £12.21 for over-21s and from £8.60 to 10.00 for those aged 18-20.
Many employers with salary sacrifice arrangements could consider ways in which to boost employee participation where there is a low take-up, thereby increasing employer NIC savings. Communication and explaining the benefit of salary sacrifice to employees is often the key in this respect. Where appropriate, employers may also want to review ways in which to extend their schemes beyond pension salary sacrifice to eligible benefits, such as holiday purchase or a bikes-for-work scheme.
Whether or not it is possible for employers to increase NIC savings from their salary sacrifice scheme, compliance with the NMW and NLW legislation should not be overlooked.
By their nature, salary sacrifice arrangements reduce an employee’s pay. However, by law, an employee’s pay, as calculated in accordance with the NMW and NLW rules, must not fall below the prevailing NMW and NLW thresholds. Therefore, if they have not done so already, employers should urgently review the position to ensure that employee pay from 1 April, after taking account of any planned sacrifice, is at or above the increased applicable NMW or NLW thresholds. Non-compliance in this area can lead to substantial fines and potentially criminal sanctions where they are not addressed.
It is also important to note that any reduction in a pension salary sacrifice to meet the NMW or NLW legislation does not change the employer’s obligations when it comes to auto-enrolment and its compliance with minimum contributions.
NMW and NML legislation is not straightforward, particularly when it comes to the calculations required to determine whether the rules are met. Salary sacrifice is an added complication in this regard. As such, employers should, of course, seek advice where they are not clear, particularly given the potential consequences of getting it wrong.
Lee McIntyre-Hamilton is an employment tax partner at Keystone Law
