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National Living Wage and Salary Sacrifice


Posted on 10 February 2016

The new National Living Wage (NLW) will be compulsory from 1 April 2016 for workers aged 25 or over and those who are not in the first year of an apprenticeship. The NLW will start at £7.20 an hour with a rise to £9 an hour by 2020. However the existing National Minimum Wage (NMW) will still apply for workers who are aged 24 and under.

Whilst the principle of NLW is generally understood, and some employers have started to look into which employees qualify for a rate increase, the potential impact on salary sacrifice schemes is easily overlooked.

The £7.20 an hour rate could potentially have a significant impact on an employer’s salary sacrifice arrangements. This is because salary sacrifice has the potential to reduce an employee's income below the appropriate minimum level and whilst most employers take care to ensure that those limits are not breached when a new salary sacrifice scheme is implemented, or new employees join existing schemes, the impact of rises to the NMW limits are often overlooked. As the new NLW is significantly above the current NMW rates, there is a real possibility that employees who are comfortably above the NMW rates will drop below the NLW once salary sacrifice deductions are taken into account. As a result, some staff who have up until now enjoyed salary sacrifice tax and NI savings, may no longer be able to do so from 1 April 2016.

Any inadvertent underpayments will result in the employer having to pay staff the shortfall. HMRC will also impose statutory penalties of up to £20,000 per employee underpaid, and the employer will be named in the press as being a non-compliant employer.

The Government has already announced that it will take measures to ensure that from April 2016 both the NMW and NLW are followed, and Smith Cooper has already seen a significant increase in the number of NMW inspections being carried out.

Our recommendation is that, prior to 1 April 2016, all employers operating any type of salary sacrifice should review the arrangements in place to ensure that the relevant NMW and NLW limits are not breached in respect of any of their employees.

Smith Cooper’s Employment Tax team can provide specialist advice relating to reviewing and assessing the impact of the changes, making recommendations and drafting communications to advise employees affected by the impact of the NLW on their salary sacrifice arrangement.

For more information on NMW/NLW, salary sacrifice schemes and the interaction of the two, please contact Laura Parr, or Mick Verney .

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