Salary sacrifice and national living wage

Hector66

Hi all

My wife is looking to increase the amount going into her DC pension via salary sacrifice and we are trying to identify the maximum she can take it to, within the £40k AA. Her pre-sacrifice salary is £41,249 and she was planning to increase the sal sac percentage to 71% (currently it's 35%), taking her post-sacrifice salary down to £11,962pa. Her employer adds another 7.5% which would take the total contribution to £41,249 x 78.5% = £32,380, so within the AA.

However, doing our own research today, we find the HMRC site telling us that sal sac cannot take an employee's cash earnings below National Minimum Wage rates. We assume for persons over age 22 (which she is) this would instead be National Living Wage rates, although we can't see this distinction made on the HMRC page. Are we correct so far - on the primary point about the NMW / NLW acting as a cap on DC sal sac, and that for my wife it would be the NLW rate which would be relevant?
 
Assuming we are getting the theory right so far, can we check the calculation with an example:

• NLW rate for 2021-22 = £8.91
• Assume a person working full time 37hrs per week, their NLW pa would be £8.91 x 37 x 52 = £17,143
• Assume person's pre-sal sac salary = £41,249
• Therefore maximum they could sal sac is £41,249 minus £17,143 = £24,106 
• And so in percentage terms the maximum they could sal sac would be £24,106 / £41,249 = 58%

Does this calculation look correct?
 
If we are still on the right track, could we ask for thoughts on one final point? Does the interaction between sal sac and NLW apply at an annual level, as opposed to monthly, weekly or some other period?  For example, assume a person increases their monthly sal sac part way through the tax year so that the new level of sal sac would, if multiplied up by 12 to a full year-equivalent, take their cash earnings below NLW. Would they nonetheless still be able to go ahead with that increased sal sac level for the duration of the current tax year provided their sal sac for the earlier part of the tax year was sufficiently low to keep their actual cash earnings above NLW?

Any thoughts on this very much appreciated.

QrizB

Your NWM numbers look to be the right ballpark, but I haven't checked them and there could be wrinkles depending on exactly how many weeks there are in a year (some tax years have 53).

I'm pretty sure he NMW calculation is periodic, not annual, depending on your pay period. I'm paid monthly, and I'm not allowed to sacrifice down to less than a month's worth of NMW. If paid weekly, it would be a week's NMW.

Depending on the scheme, you might be able to make personal contributions and so increase your contributions beyond the NMW limit.

Dazed_and_C0nfused

It applies to pay periods, which I don't think can be longer than a month and as such I think what has happened previously is irrelevant (for minimum wage purposes).

https://www.gov.uk/guidance/calculating-the-minimum-wage/calculating-the-minimum-wage

Marcon

Hector66 said:

Hi all

My wife is looking to increase the amount going into her DC pension via salary sacrifice and we are trying to identify the maximum she can take it to, within the £40k AA. Her pre-sacrifice salary is £41,249 and she was planning to increase the sal sac percentage to 71% (currently it's 35%), taking her post-sacrifice salary down to £11,962pa. Her employer adds another 7.5% which would take the total contribution to £41,249 x 78.5% = £32,380, so within the AA.

However, doing our own research today, we find the HMRC site telling us that sal sac cannot take an employee's cash earnings below National Minimum Wage rates. We assume for persons over age 22 (which she is) this would instead be National Living Wage rates, although we can't see this distinction made on the HMRC page. Are we correct so far - on the primary point about the NMW / NLW acting as a cap on DC sal sac, and that for my wife it would be the NLW rate which would be relevant?
 
Assuming we are getting the theory right so far, can we check the calculation with an example:

• NLW rate for 2021-22 = £8.91
• Assume a person working full time 37hrs per week, their NLW pa would be £8.91 x 37 x 52 = £17,143
• Assume person's pre-sal sac salary = £41,249
• Therefore maximum they could sal sac is £41,249 minus £17,143 = £24,106 
• And so in percentage terms the maximum they could sal sac would be £24,106 / £41,249 = 58%

Does this calculation look correct?
 
If we are still on the right track, could we ask for thoughts on one final point? Does the interaction between sal sac and NLW apply at an annual level, as opposed to monthly, weekly or some other period?  For example, assume a person increases their monthly sal sac part way through the tax year so that the new level of sal sac would, if multiplied up by 12 to a full year-equivalent, take their cash earnings below NLW. Would they nonetheless still be able to go ahead with that increased sal sac level for the duration of the current tax year provided their sal sac for the earlier part of the tax year was sufficiently low to keep their actual cash earnings above NLW?

Any thoughts on this very much appreciated.

The National Minimum Wage is the minimum pay per hour almost all workers are entitled to. The National Living Wage is higher than the National Minimum Wage - workers get it if they're over 23, so yes, this would be the rate which applies to your wife. https://www.gov.uk/national-minimum-wage-rates

Pay reference periods are usually set by how often someone is paid, for example one week, one month or 10 days. A pay reference period cannot be longer than 31 days. A worker must be paid the minimum wage, on average, for the time worked in the pay reference period. https://www.gov.uk/national-minimum-wage/employers-and-the-minimum-wage

lisyloo

I do similar and the figure looks about right, but do be aware that this must be received in cash.
so it is net of any benefits.
so for example if your wife’s company deduct for life insurance or private medical or anything like that, then the NMW applies to cash after any deductions.

There is nothing stopping her putting her own money into a pension up to £40k if she wants although it loses the salary sacrifice benefit and of course only works if you can live on less than min wage.
i put the remainder into a SIPP which I still consider worthwhile (25% tax free lump sum), but I have other income so can afford to take less than NMW.

Hector66

Many thanks for everyone's help. Appreciated.

Nmwspecialist

NLW and NMW is complicated, especially around the salary sacrifice risk.
Employers must perform a NMW/NLW check each pay period (be that, weekly, 4weekly or monthly), to ensure the salary sacrifice reduction plus any other relevant deductions, do not take the pay below the NMW/NLW rates.
What should and shouldn’t be included in the NMW /NLW calculations is dependent of which worker category (as defined by NMW legislation) the employee is- salaried, unmeasured, time or output.

Malthusian

The complications of national minimum wage are a big part of the reason employers don't offer salary sacrifice as standard.

We've seen people run into trouble by causing their employer to break minimum wage law, as a result of which the employer cancels the salary sacrifice arrangement and refuses to offer it again.

If your wife sal sacs down to minimum wage based on her normal hours of work and then works through a lunch break, she will inadvertently have caused her employer to commit a criminal offence. Unpaid overtime counts in the minimum wage calculation.

I would be inclined to leave a margin for error, at the expense of lower tax relief, rather than try to sacrifice all the way down to the absolute minimum.

Wellgood

Does anyone know if you should look at taxable pay as per P60 or is it net pay (after tax) that needs to be higher then the NMW
i.e. do you need to receive 8.91 per hour after tax or before tax?

Thrugelmir

NMW is a gross rate per hour. 

Nmwspecialist

Wellgood - NMW calculations are based on gross pay /contractual pay. If you have a salary sacrifice reduction to pay then it is based on the (monthly) new reduced contractual figure.