Salary sacrifice arrangements continue to be a popular way for employers to enhance their benefits offering and support employees in a tax-efficient manner. From pension salary sacrifice to Cycle to Work schemes and electric vehicle arrangements, these benefits can provide meaningful value to employees while also helping employers create more competitive remuneration packages.
However, as more businesses introduce or expand salary sacrifice schemes, it is important that employers do not overlook one key compliance area: National Minimum Wage (NMW).
Many employers understand salary sacrifice from a tax and National Insurance perspective, but fewer consider how these arrangements interact with NMW rules. This can create an unexpected compliance risk, particularly where employees are paid at, or close to, the applicable minimum wage rate.
A salary sacrifice arrangement is an agreement to reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit. GOV.UK guidance states that employers can set up salary sacrifice arrangements by changing the terms of the employee’s employment contract, with the employee’s agreement. The same guidance also confirms that a salary sacrifice arrangement must not reduce an employee’s cash earnings below National Minimum Wage rates.
For employers, this means that a salary sacrifice scheme cannot simply be assessed based on whether the benefit is attractive or whether the employee has agreed to participate. The impact on contractual pay must also be reviewed carefully.
Why salary sacrifice can create an NMW issue
The key point for employers to understand is that salary sacrifice reduces an employee’s contractual pay for NMW purposes. This is not treated in the same way as a standard post-payroll deduction.
HMRC’s National Minimum Wage Manual explains that, where a genuine salary sacrifice is in place, the worker no longer has entitlement to the sacrificed amount under their contract. As a result, the amount given up through salary sacrifice is not included in a worker’s total remuneration for National Minimum Wage pay purposes.
This distinction is important. An employee may appear to earn above the National Minimum Wage based on their headline hourly rate or salary before sacrifice. However, once the salary sacrifice arrangement is applied, their contractual cash pay may fall below the legal minimum.
This risk is particularly relevant for employees whose pay is already close to the applicable NMW rate. Even a relatively small salary sacrifice amount can create a breach if the employer does not carry out the correct checks.
For example, an employee may earn £13.00 per hour, which is above a National Minimum Wage rate of £12.71. If that employee wishes to enter into a pension salary sacrifice arrangement, the employer must check whether the proposed sacrifice would reduce their pay below £12.71 per hour for NMW purposes. If it would, the employer must either limit the amount that can be sacrificed or prevent the employee from joining the arrangement.
Salary sacrifice remains valuable, but it must be managed correctly
Salary sacrifice arrangements are not inherently problematic. In many cases, they can be a valuable part of an employer’s reward strategy. Pension salary sacrifice, Cycle to Work schemes, electric vehicle schemes and other benefits can help employers support their workforce while making remuneration packages more attractive.
The issue is not the existence of salary sacrifice, but the lack of monitoring that sometimes surrounds it.
As organisations grow and benefits become more sophisticated, payroll compliance must remain part of the conversation. A salary sacrifice arrangement that works well for one employee may not be appropriate for another if their pay is closer to the NMW threshold. Similarly, arrangements that were compliant when first introduced may need to be reviewed if wage rates, working patterns or benefit values change.
GOV.UK guidance states that employers must put procedures in place to cap salary sacrifice deductions and ensure that National Minimum Wage rates are maintained. This makes regular review essential, not optional.
The role of working time in NMW calculations
When reviewing NMW compliance, employers should not focus only on pay. They also need to consider working time.
Unpaid working time can affect NMW calculations because it increases the number of hours worked. If an employee works additional time before or after a shift, attends mandatory training, or completes other work-related activities that count as working time, this can reduce their effective hourly rate for NMW purposes.
This can be a particular issue where employees are paid close to the NMW threshold. Even if their pay appears compliant based on contracted hours, additional unpaid time can change the calculation.
For example, if an employee is required to attend training outside their normal paid hours, or regularly starts work before their shift begins, those hours may need to be considered when assessing NMW compliance. If they are not included in the calculation, the employer may unintentionally underpay the employee for NMW purposes.
This is why employers should review salary sacrifice arrangements alongside working patterns, payroll data and time recording processes. Looking at salary alone may not provide a complete picture.
Common areas where employers may be exposed
NMW risk can arise in several practical situations. One of the most common is where employees are offered salary sacrifice benefits without a clear payroll control to prevent them from falling below the minimum wage.
Another potential issue is where employers apply a uniform salary sacrifice policy across the workforce without considering individual pay levels. Higher-paid employees may be able to participate in a scheme without difficulty, while lower-paid employees may require restrictions or caps.
Employers may also face risk where employees’ hours fluctuate. Variable working patterns, overtime, unpaid training or additional duties can all affect NMW calculations. If payroll processes do not capture these changes accurately, the employer may not identify a potential breach.
There can also be risk when arrangements are reviewed only at the point of enrolment. NMW rates change over time, and employees’ pay, benefits and hours may also change. A salary sacrifice arrangement that was compliant when first introduced may not remain compliant indefinitely.
Why this matters for employers
NMW compliance is a legal obligation, but it is also a reputational and operational issue. Employers are expected to ensure that workers receive at least the minimum pay required by law. Where underpayments occur, even unintentionally, the consequences can be costly and damaging.
For many employers, the challenge is that the risk is not always obvious. A benefit scheme may be designed with good intentions and may be welcomed by employees. However, if the scheme reduces contractual pay below the required level, or if working time has not been accurately captured, the employer could still be exposed.
This is why payroll, HR and finance teams should work together when introducing, reviewing or expanding salary sacrifice arrangements. These schemes sit at the intersection of employment terms, payroll processing, benefits administration and compliance. A joined-up approach can help ensure that employees receive the intended benefit without creating unintended NMW issues.
Practical steps employers should consider
Employers offering salary sacrifice schemes should consider building regular NMW checks into their payroll processes. This may include reviewing employees’ post-sacrifice pay against the applicable NMW rate, especially for employees paid close to the threshold.
Employers should also consider whether their payroll system includes a cap or warning mechanism to prevent salary sacrifice from reducing pay below the legal minimum. GOV.UK guidance specifically notes that employers must have procedures in place to cap salary sacrifice deductions and maintain NMW rates.
In addition, employers should review working time records to ensure that mandatory training, additional time worked and other relevant hours are being captured accurately. Where there is uncertainty, it may be appropriate to review policies, contracts and payroll processes to ensure they align with NMW requirements.
Communication with employees is also important. Employees may wish to participate in a salary sacrifice arrangement, particularly where it relates to pensions or other valued benefits. However, employers should make clear that participation may need to be limited where it would result in pay falling below the NMW threshold.
Keeping benefits compliant and effective
Salary sacrifice schemes can play an important role in a strong employee benefits strategy. They can help employers offer meaningful support to employees while managing employment costs and improving engagement.
However, these arrangements need to be managed carefully. NMW compliance should be considered at the outset of any salary sacrifice arrangement and reviewed regularly as pay rates, working hours and statutory thresholds change.
The aim should not be to discourage employers from offering salary sacrifice benefits. Rather, it should be to ensure that those benefits are delivered in a way that is compliant, sustainable and aligned with the employer’s wider responsibilities.
For employers, the key takeaway is simple: employee benefits and payroll compliance should go hand in hand. By reviewing salary sacrifice arrangements, monitoring working time and applying appropriate safeguards, employers can continue to offer valuable benefits while reducing the risk of unintended NMW breaches.
How Prager Metis can help
At Prager Metis, our UK payroll team works with employers to help manage payroll compliance and identify potential areas of risk. This includes reviewing salary sacrifice arrangements, employee benefits, payroll processes and related compliance obligations.
If your organisation offers salary sacrifice schemes, or is considering introducing them, now is a good time to review whether your arrangements remain National Minimum Wage compliant.
A proactive review can help protect your business, support your employees and ensure your benefits strategy continues to deliver value without creating unexpected compliance exposure.
To discuss your payroll arrangements or review the impact of salary sacrifice on National Minimum Wage compliance, contact the Prager Metis UK team.
