Next month, workers in the UK aged 25 and earning the minimum rate of £6.70 per hour will see a 50p increase to £7.20 under the new National Living Wage, introduced for all firms in support of the Government’s vision of a higher wage, lower welfare, lower tax society.
The new National Living Wage, which takes effect from April 1st and was announced by the Chancellor at the Summer Budget, will affect over a million workers in the UK who are set to directly benefit from the increase.
According to Government estimates, many will see their pay packets rise by up to £900 a year, in what is claimed to be the largest annual increase in a minimum wage rate across any G7 country since 2009 in cash and real terms.
Why the National Living Wage?
Chancellor George Osborne has said that the new National Living Wage is a way of helping more people to have the security of a higher wage to provide for themselves and their families.
The National Living Wage will apply to all firms and HMRC will have responsibility for enforcing the standard and will take firm action where an employer fails to pay the correct wage.
However, the new National Living Wage only applies to those employees who are 25 and older. Those younger than that are still bound by the National Minimum Wage which dependent on employee age.
Under its existing terms, those employees over 21 but under 25, are paid an hourly rate of £6.70; those 18-20 it is £5.30 per hour and for those under 18 it is £3.87 an hour.
How does this affect salary sacrifice?
Those employers who utilise salary sacrifice schemes for a host of employee benefits, such as cars, childcare vouchers, cycle-to-work, private healthcare, personal computers and many more, need to be aware of the impact of the new limits.
Under the rules for all salary sacrifice schemes, as confirmed by the HMRC website, a salary sacrifice arrangement cannot reduce an employee’s cash earnings below the National Minimum Wage rates.
Most organisations are aware that this minimum cannot be breached, but many firms may not realise the combined impact of several salary sacrifices together.
For example, a salary sacrifice for childcare vouchers may leave the employee seemingly well above the minimum for both the National Living Wage and the National Minimum Wage.
But, an additional sacrifice for another benefit, such as pensions, might cumulatively drop the employee below the limit, falling foul of HMRC rules.
Similarly, a deduction from salary in support of a salary sacrifice car scheme cannot be allowed to reduce the employee’s wages below the minimum standard.
Why is this increasingly relevant?
Utilising salary sacrifice to support employee benefits is now such a common occurrence that there was a warning within the Summer Budget that the Treasury is monitoring the situation to ensure the loss to the exchequer does not get out of hand.
Salary sacrifice car schemes especially have been one of the success stories of recent times, and increasing numbers of organisations now offer employees the benefit of brand new cars in return for surrendering a set amount from their salary every month.