Understanding the risks of salary sacrifice for minimum wage workers

Salary sacrifice schemes can be a very useful way to help employees reduce their taxable income whilst offering them attractive benefits. If you use these schemes, and especially if you employ workers on National Minimum Wage (NMW) rates, they can present risks. It is important to be aware of the regulations concerning salary levels and how you could fall foul of the rules inadvertently.

This article does not consider the tax position on benefits provided to employees under salary sacrifice, but rather the effects of salary sacrifice on NMW.

From 1 April 2025, national minimum wage (NMW) rates will increase by between 6.7% and 18%, with the national living wage being set at £12.21 per hour.

Employers national insurance contributions (NICs) are also set to rise from 13.8% to 15% on earnings above the NIC secondary threshold. The employers’ NIC threshold has significantly reduced from £9,100 to £5,000.

These changes have significant implications for employers because when employees opt into salary sacrifice, they effectively reduce their gross salary in exchange for non-cash benefits ; common examples include pension contributions, childcare vouchers, cycle to work schemes and holiday purchases.

As salary sacrifice arrangements reduce participating employees’ pay, it is the post-salary sacrifice amounts which must be taken into account when considering NMW compliance. For workers on lower pay rates like the NMW, it can mean their salary falls below the legal pay threshold, which could expose your business to legal and financial risks.

Summary – Key risks of salary sacrifice

• National Minimum Wage (NMW) Compliance Issues: If the employee’s salary, after the sacrifice, falls below the NMW, you could be breaking the law. The government’s NMW rules require employers to pay workers at least the prescribed minimum rate, and salary sacrifice schemes must not lower the “cash” pay to an amount below that threshold.

• Bear in mind that NMW applies to directors who may be taking lower salaries which they supplement with dividends.

• Fines and Penalties: Non-compliance of wage levels can lead to heavy fines, penalties, and reputational damage. The risks are particularly high for businesses that employ lower-paid workers, because even a small salary sacrifice can push earnings below the NMW.

• The use of salary sacrifice schemes is increasingly being monitored by HMRC. If your employees’ pay appears to violate NMW regulations, your business could face an investigation and possibly also be required to make backdated payments to employees.

• If an employer is found to have been underpaying NMW over the previous six years, they must repay the arrears back to the underpaid workers (including ex-workers) and they can also face penalties of up to 200% of the underpayment.

• There is also a serious risk of reputational damage because the Department for Business and Trade may publish the names of employers that fail to comply with NMW laws.

How to mitigate these risks

• Review what the latest NMW thresholds and regulations are, to ensure that any salary sacrifice schemes won’t inadvertently breach the minimum wage regulations;

• Regularly check employee salaries to ensure that even after salary sacrifices, their pay stays above the NMW level.

In conclusion, while salary sacrifice schemes may offer tax advantages and benefits for employees, business owners must carefully assess the potential impact on NMW compliance to avoid costly penalties and ensure fair compensation.

If you would like to discuss introducing tax efficient employee benefit schemes, please contact us via partners@rjp.co.uk.