The impending National Minimum Wage increase and the associated salary exchange risks

The impending National Minimum Wage increase and the associated salary exchange risks

Businesses need to be aware of the forthcoming increases to the National Minimum Wage rates, as they may mean adjustments are required for some employees. Here, we explore the increases and the interaction with salary sacrifice schemes that may be in place.

What’s changing?

From 1 April 2024, the main National Minimum Wage (NMW) rate, which is known as the National Living Wage (NLW), will be increasing by nearly 9.8% - from £10.42 to £11.44 per hour. In addition, the NLW rate will also now apply to those aged 21 and over (currently 23 and over), meaning an increase for employees aged 21-22 of more than 12% (from £10.18 to £11.44).

Whilst this increase will clearly impact on employers with lower paid staff, if businesses also operate a salary sacrifice scheme (e.g. Pension Salary Exchange, Cycle To Work, Childcare Vouchers, electric company cars), special attention may be needed – as no employee salary after salary sacrifice can fall below NLW levels. As such, analysis will be required to help you ensure that no employee salaries fall below NLW level from April.

As an example, an employee aged 21 or over, on a contractual 37.5 hour working week, will need to be paid a minimum annual salary of £22,308 to meet the new £11.44 hourly rate from April.

When salary sacrifice is in place

If that employee profiled above is part of a Pension Salary Exchange scheme (and so their gross salary is reduced by the standard 5% under that arrangement), their annual gross salary would need to be £23,483 (or £12.04 per hour). If that employer operated a Qualifying Earnings (QE) pension scheme, that hourly rate drops to £11.88 per hour (as only earnings between the £6,240 lower and £50,270 upper earning thresholds are pensionable).

Below is an overview of the effective hourly rates for NLW purposes. It’s split into three categories:

• employees that are not in any salary exchange scheme
• those, for example, part of a Pension Salary Exchange scheme
• those that are in Pension Salary Exchange where the pension is a Qualifying Earning scheme

*For those making higher percentage contributions under PSE than the standard 5%, these hourly rates will increase. The lower NMW rates (those aged under 21) also need to be considered to ensure compliance with regulations.

We are here to help

If your staff are comfortably above the new NLW rates, it’s unlikely your business will have any risk and subsequently no changes will be needed. However, if you believe there may be some staff members at risk of falling below NLW from April, please get in touch with a member of our specialist Employer Solutions team or your usual advisor. We can review the position, perform the necessary calculations and advise as needed.

It’s important to note that this article is focused on the NMW compliance risks in respect of salary exchange schemes. There are many other ways NMW non-compliance can occur (including net pay deductions, time recording systems, unpaid overtime workers etc), and we will be issuing further insight on these wider risk areas in the coming weeks. If you have any questions in the meantime, please get in touch.