13th December 2018

There are two major changes taking place in April 2019 which present employers with opportunities to increase their savings while at the same time increasing their compliance risks; increases in both the mandatory amount of employee pension contributions as well as the hourly rate of National Minimum Wage/National Living Wage.

What are the changes?

An increase in pension contributions provides an opportunity for employers and employees to save an increased amount of NIC if they already operate a pension salary sacrifice arrangement. As a direct result of the pension increase and the rise in the NMW/NLW thresholds, there will be more potential to fall foul of the NMW/NLW rules particularly where employers are already operating salary sacrifice.

Employers should consider the implications of both changes to understand how it will affect them and their employees.

Saving Opportunities

For any employers who want to enter into salary sacrifice arrangements in the future, or who currently have these agreements in place, there are increased NIC saving to be had due to the increased minimum employee pension contribution.

As the salary is being ‘exchanged’ rather than paid, neither the employee nor the employer pays NICs on the exchanged (i.e. reduction in salary) amount.

An employer’s saving will be 13.8% of any amount sacrificed (usually the amount of the employee pension contribution) for each employee, and in addition there is the potential to save 0.5% on apprenticeship levy payments for those companies with an annual pay bill of more than £3 million.

NMW/NLW Compliance

The pension salary sacrifice arrangement reduces an employee’s gross salary for the purposes of the NMW/NLW. Therefore, with an additional 2% reduction in salary because of pension salary sacrifice, employers will need to be careful that an employee’s new gross salary (after the reduction in salary) stays above the increased hourly rates for NMW/NLW.

Employers need to identify those employees who are currently part of a pension salary sacrifice arrangement to identify those individuals who may be paid at a rate below the NMW/NLW hourly rates.


To illustrate this by way of example:

Not Compliant Compliant
Hours per Week 40 40
Hourly rate before pension sacrifice £8.21 £8.64
Amount per Year £17,132.63 £18,034.35
5% Pension Sacrifice £856.63 £901.72
Gross Pay for NMW/NLW £16,276.00 £17,132.63
Hourly rate after pension sacrifice £7.80 £8.21

 


From the example above, an employee receiving the NLW from April 2019 earns in excess £17,000 per year. However, when the pension salary sacrifice is deducted from this amount, the employer would not be compliant with the NMW/NLW rules.

What Employers Need to Do

Employers who do not currently operate pension salary sacrifice should now consider the benefits of implementing the scheme with effect from April 2019.

Employers who do operate a pension salary sacrifice arrangement will need to identify individuals who might be at risk of falling below the NMW/NLW thresholds.

 

For more information on any employment tax related matters please contact either: Lee Muter, Employment Taxes Partner, on 0191 243 6089 or at leemuter@unw.co.uk; or Rebecca Kemp, Employment Taxes Consultant, on 0191 243 6070 or at rebeccakemp@unw.co.uk

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