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BEIS guidance

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National living wage increase and salary sacrifice

NLW increase

It was announced in November 2023 that the national living wage (NLW) would be increasing by £1.02 to £11.44 per hour in April 2024. A significant change is that the main NLW rate will apply to workers from age 21 rather than age 23 so they effectively have a 12.4% increase. The rates from 1 April 2024 are:

Salary sacrifice schemes

Many companies run salary sacrifice schemes which offer tax and NI-free benefits, such as pension contributions, cycle to work and childcare vouchers, to employees in exchange for them giving up some of their salary.

Tip. To be effective, the employee’s contract must be altered to reflect the revised arrangements, i.e. the reduced salary and the new benefit. If the change is not contractual and the employee can revert to the higher salary at will, HMRC will continue to tax the employee as if they were still receiving the higher amount.

Tip. With the 2% cut in employees’ NI from January 2024, you will need to rework your employee salary sacrifice calculations as there will be a salary sacrifice benefit saving loss equal to the drop.

NLW and salary sacrifice problem

If an employee decides to take a reduced salary in return for a benefit, it’s this reduced salary which you need to consider when establishing whether or not they are receiving pay of at least the NLW level (or, from April 2024, the national minimum wage (NMW) if they’re under 21). As a result, participation in salary sacrifice could lead to you inadvertently breaching the NLW/NMW legislation.

Tip. With the NLW increasing by almost 10% in April 2024, you may have employees who will be earning at or close to the NLW who won’t, therefore, be able to participate in salary sacrifice arrangements.

Payroll processes

It’s important that you have processes in place to: (1) identify, at the start, whether the employee can participate in salary sacrifice arrangements without breaching the NMW/NLW legislation; and (2) monitor pay regularly to ensure there isn’t a breach of the rules when there’s a rate increase.

The risk of breaching the rules is higher if you offer a suite of salary sacrifice arrangements to your employees - it’s the aggregate of all salary sacrifices in a pay reference period that you need to monitor.

Tip. Ensure you manage employee expectations and make clear to them that the arrangements are only available where it does not result in an infringement of the rules for the employee.

Tip. If HMRC tries to charge you penalties for non-compliance, check the Department for Business, Energy, and Industrial Strategy (BEIS) guidance (see The next step ) on the circumstances in which employers should not be issued with penalties for NLW/NMW breaches related to salary sacrifice arrangements.

BEIS guidance