Does the national living wage have an impact on your salary sacrifice arrangements?

The introduction of the national living wage (NLW), effective from April 2016, is a significant change for employers due to the possible additional cost.

Additionally, however, employers need to recognise that this could have implications regarding salary sacrifice schemes they operate.

It is a current legal requirement for employers to make sure that, for those staff entering into a salary sacrifice arrangement, they cannot reduce an employee’s cash earnings below the national minimum wage rate. From April 2016, where an employee is entitled to the new NLW, employers will need to make sure that participation in a salary sacrifice arrangement does not reduce an employee’s cash earnings to below the NLW rate.

This means that there is likely to be an impact on existing salary sacrifice arrangements, particularly where employees participating in a salary sacrifice arrangement are paid close to the current NMW.

If an employee is entitled to the NLW, and their notional salary remains the same, the employee’s cash earnings could then fall below the specified NLW rate and the salary sacrifice arrangement will no longer be compliant.

Employers should review their existing salary sacrifice arrangements ahead of April 2016 to identify those employees that are likely to be affected, so they can demonstrate to HMRC that they are complying with tax legislation. This will also minimise any risks associated with the NLW and the salary sacrifice arrangement and ensure that the organisation’s current salary sacrifice arrangements are not compromised.

For further information about the changes or the options available, please contact Caroline Rai or your usual RSM contact.