Salary sacrifice and minimum wage

In February, the HMRC released a list of 524 employers who had breached National Minimum Wage (NMW) regulations, which is thought to have affected over 172,000 workers and led to underpayments equating to nearly £16 million.

This also marks a steep increase from the HMRC’s June 2023 figures, where it found 200 employers had failed to comply with NMW regulations.

The main reasons for the NMW faults listed in this latest bulletin included:

• Incorrectly deducting pay from worker’s wages (35%);
• Failing to pay workers for correct working time (31%); and
• Paying the incorrect apprenticeship rate (16%).

One of the key issues raised by the HMRC in this bulletin was errors around pay deductions and salary sacrifice schemes.

In a salary sacrifice scheme, workers can agree to reduce their contractual pay in exchange for another benefit, such as purchasing additional annual leave, a Company car and/or increased pension contributions.

However, the problem occurs where the pay reduction results in the employee ending up with a rate of pay that is below their applicable NMW rate. This then becomes a breach of NMW regulations.

Employers therefore need to ensure that, if they have any salary sacrifice schemes operating within the Company, the pay reduction does not take any employee below their NMW rate.

Irrespective of any other benefits, all employees’ rate of pay must meet or exceed their applicable NMW rate.