National Minimum Wage compliance: Are your pension arrangements putting you at risk?
Over recent years, we’ve seen HMRC launch an intensified regional enforcement campaign targeting National Minimum Wage (NMW) compliance, with enforcement activity putting businesses under greater pressure to ensure their payroll arrangements are correct. Underpayments can lead to financial penalties, public naming, and reputational damage, so it’s essential to identify potential issues before they escalate.
One area that can easily be overlooked is salary sacrifice pension arrangements. Designed to benefit both you and your employees, these arrangements could leave your business vulnerable to an unexpected compliance issue if they reduce an employee’s pay below the applicable National Minimum Wage rate.
One area that can easily be overlooked is salary sacrifice pension arrangements. Designed to benefit both you and your employees, these arrangements could leave your business vulnerable to an unexpected compliance issue if they reduce an employee’s pay below the applicable National Minimum Wage rate.
What is Salary Sacrifice, and how can it affect National Minimum Wage?
Salary sacrifice is an arrangement in which an employee gives up part of their contractual cash salary in exchange for a benefit, such as an employer pension contribution. It must be agreed with the employee and reflected in their contractual arrangements. It also, however, affects the calculation of an employee’s pay for National Minimum Wage purposes.
An employee’s sacrificed amount cannot count toward their National Minimum Wage entitlement, so if the resulting pay falls below the applicable minimum wage rate for the relevant pay reference period, the employer has technically underpaid that employee.
An employee’s sacrificed amount cannot count toward their National Minimum Wage entitlement, so if the resulting pay falls below the applicable minimum wage rate for the relevant pay reference period, the employer has technically underpaid that employee.
This can happen even when:
- An employee has voluntarily agreed to the salary sacrifice.
- The pension arrangement has been operating for some time without any apparent issues.
- The employee’s headline salary appears to be above the National Minimum Wage.
- Payroll calculations are otherwise processed correctly.
What are the consequences of NMW underpayment?
National Minimum Wage compliance is a legal obligation. Where HMRC identifies underpayments, the consequences can extend beyond the cost of correcting payroll.
Financial penalties
Employers may be required to repay the wages owed to affected workers and pay a financial penalty. Under the standard penalty rules, this can amount to 200% of the arrears, subject to the applicable limits and any relevant exceptions.
Public naming
Employers who breach National Minimum Wage legislation may be publicly named under the government’s naming scheme. This can create reputational difficulties, particularly for businesses that rely on the trust of clients and employees – both current and prospective.
Time and management costs
Responding to an HMRC enquiry can require detailed payroll records, employment contracts and supporting documentation. Investigating historic pay periods and correcting errors can also place additional pressure on finance and HR teams.
HMRC’S ‘nudge letters’
HMRC uses targeted communications, sometimes called nudge letters, to encourage employers to check whether they are complying with their obligations. These letters can highlight areas where businesses may be at risk of making errors and give them an opportunity to review their affairs.
Receiving a nudge letter does not, by itself, mean that HMRC has established an underpayment or started a formal investigation. It is, however, a useful prompt to check that your processes are working as intended.
Receiving a nudge letter does not, by itself, mean that HMRC has established an underpayment or started a formal investigation. It is, however, a useful prompt to check that your processes are working as intended.
How can you check your payroll is compliant?
A regular review of your payroll arrangements can help identify potential issues before they become more difficult to resolve.
Consider whether you:
Check salary sacrifice arrangements: Ensure pension contributions and other salary sacrifice benefits do not reduce an employee’s pay below the applicable National Minimum Wage rate.
Review pay and working hours: Check that employees receive the correct minimum wage for their age or eligibility category, taking account of the hours that count for minimum wage purposes.
Assess deductions and benefits: Confirm that payroll deductions, expenses and benefits are treated correctly when calculating minimum wage pay.
Keep accurate records: Maintain clear payroll records, working hours, employment contracts and evidence of agreed salary sacrifice arrangements.
Review changes regularly: Revisit calculations when minimum wage rates change, employees’ working patterns change or new benefits are introduced. These checks should form part of a wider payroll compliance process, rather than a one-off exercise.
Check salary sacrifice arrangements: Ensure pension contributions and other salary sacrifice benefits do not reduce an employee’s pay below the applicable National Minimum Wage rate.
Review pay and working hours: Check that employees receive the correct minimum wage for their age or eligibility category, taking account of the hours that count for minimum wage purposes.
Assess deductions and benefits: Confirm that payroll deductions, expenses and benefits are treated correctly when calculating minimum wage pay.
Keep accurate records: Maintain clear payroll records, working hours, employment contracts and evidence of agreed salary sacrifice arrangements.
Review changes regularly: Revisit calculations when minimum wage rates change, employees’ working patterns change or new benefits are introduced. These checks should form part of a wider payroll compliance process, rather than a one-off exercise.
How can a PAYE Review help?
A PAYE Review, also known as a ‘PAYE Health Check’, provides an opportunity to examine your payroll processes and identify areas where your business may be exposed to compliance risks.
Our team can review key areas of your PAYE arrangements, including:
Our team can review key areas of your PAYE arrangements, including:
- National Minimum Wage and National Living Wage calculations.
- Salary sacrifice pension arrangements and other employee benefits.
- Benefits in kind and expenses.
- IR35 and off-payroll worker status.
- Real Time Information (RTI) submissions.
- The review can help you understand where processes may need attention, identify potential breaches and establish practical steps to improve future compliance.
A PAYE Review can help you assess whether your current arrangements are working as intended and identify potential issues before they develop into more costly problems.
Contact your client Director or Manager or make an enquiry to discuss a PAYE Review and find out how we can help you manage your payroll compliance obligations.
