National Minimum Wage
The National Minimum Wage (NMW) is a legal requirement and is set out in law. All employees must be paid no less that the NMW. Employers could see themselves taken to an employment tribunal or civil court if they do not pay their staff accordingly. The NMW differs on an employees age and whether they are an apprentice. The table below shows the NMW pay brackets as of 1 April 2022.
|Per Hour (£)|
|Aged 23 and above (National Living Wage)||9.50|
|Aged 21 to 22 inclusive||9.18|
|Aged 18 to 20 inclusive||6.83|
|Aged under 19 (but above compulsory school leaving age)||4.81|
|Apprentices aged under 19||4.81|
|Apprentices aged 19 and over (first year of apprenticeship)||4.81|
What is Salary Sacrifice
Salary sacrifice is a scheme that an employer can offer to its employees to sacrifice some of their cash-based reward for a non-cash based reward. This means that an employee can enjoy the benefits of a reward before tax, which ultimately means the gross salary is reduced and with it so does the income tax and National Insurance Contributions (NIC).
Salary sacrifice schemes must be flexible so that employees can reduce, increase or completely withdraw from the scheme. This is due to the fact that people’s lifestyles change, which include but not exhaustive to: marriage, divorce, or a partner financially situation changing such as being made redundant, or being on maternity leave for example.
SMART Scheme (Save Money and Reduce Tax)
A good example of a SMART Scheme is sacrificing some of your salary for pension contributions. At the point that your pension contribution is deducted from your pay, it has not yet been taxed, so you are utilising more of your salary, and reducing the tax.
Tax and National Insurance contributions exemptions on non-cash benefits
Exemptions on benefits in kind (BIK) do not apply to salary sacrifice schemes. The only benefits you will not need to HMRC for a salary sacrifice arrangement are:
- Payments in pension schemes (maximum of £40,000 per annum)
- Employer provided pensions advice
- Workplace nurseries
- Childcare vouchers and some employer childcare
- Bicycles and cycling safety equipment.
Benefits of Salary Sacrifice
A major benefit of the salary sacrifice scheme is that it reduces your top line, therefore you can save up to 13.8 % on National Insurance Contributions as an employee. Employers also benefit as their contributions on behalf of each of their employees also reduces.
Employees who are Higher Rate Band (HRB) tax payers and Additional Rate Band (ARB) tax payers could use salary sacrifice to reduce their taxable income. For example, if a HRB tax payer were to pay into a personal pension plan, then their tax bands are increase to reflect this, but with salary sacrifice, the amount you could sacrifice into a pension has not already been taxed, and therefore the contribution to the pension will be higher.
Save as You Earn / Sharescheme
A Save as you earn scheme (SAYE), also known as a sharesave scheme, in an arrangement where employees can set aside some of their salary (up to £500p/m) to buy shares in the company at a discount. As this is a government backed scheme, there is usually no income tax to pay, regardless of the employee acquiring the shares at a discount (up to 20% discount). All employees regardless of their job title must be able to access the scheme on similar terms, for example being employed by them for a period of 10 years.
There are also many other benefits to SAYEs such as the interest and bonus are tax-free, there is no income tax provided the option to exercise was 3 years after the option was granted, they are exempt from NICs provided they remain a government tax-advantaged share scheme. With all benefits there are limitations though. Employees may be subject to capital gains tax (CGT) on the profit they make when they sell the shares, however everyone has an annual exempt amount (AEA) of £12,300 per annum which would make the first £12,300 gain tax free, then it would be taxed at 10% or 20% depending on your tax band.
National Minimum Wage and Salary sacrifice
This all sounds good, and can be a great way to save on NIC and income tax, however there is a caveat, especially for those on salaries close to the NMW. It is written in law that the amount you sacrifice through the scheme cannot bring you below NMW. On the other hand, this could work to the benefit of those who are Higher Rate and Additional Rate Band tax payers as they can potentially sacrifice a large chunk of their salary to bring them below the 40% or 45% tax threshold.
Written by Katy North, Tax Department, Carlisle Office