The National Minimum Wage (NMW, or sometimes known as National Living Wage) was introduced in 1999, and it’s since helped millions of people by raising their pay (without destroying job opportunities, as some naysayers feared). But workers on or near NMW are missing out on a benefit their higher-earning colleagues are taking advantage of. You might have heard about salary sacrifice as a way to cut your tax costs while saving into your pension, or getting other benefits like childcare or a cycle-to-work scheme. At the moment, these schemes cannot be offered to employees who earn NMW (or just above NMW) due to the risk of their wages falling below this line — meaning that many people who could benefit from the scheme can’t get access to it.
How could salary sacrifice help people on NMW?
Salary sacrifice has a clear benefit for most employees, as it cuts the cost of National Insurance contributions. For example, if an employee is taking part in a salary sacrifice pension scheme, their contribution is taken from their salary before NI is levied. This gives them a lower salary on paper, but unlock cost savings by lowering the amount of NI paid. Each person will save 13.25% of their pension contribution (as a lower-rate taxpayer), or 3.25% as a higher-rate taxpayer.
Employers also save on NI costs through the arrangement, and this extra cash can, in some cases, be added to employees’ pensions as an extra contribution. This means an extra 15.05% of the pension contribution amount going into the pension pot. Higher-earning colleagues are therefore able to get more money in their pocket AND potentially in their pension, while those on NMW lose out.
Sahil Sethi, CEO of Maji, agrees there’s a discrepancy:
“Salary sacrifice is a tried and trusted way of making pension contributions more tax efficient for both employers and employees. But it seems unfair that some employees are left out given that those who really need a cash uplift are not able to take part.”
How much are NMW earners missing out on?
Let’s imagine two employees, Sam and Jo. Both of them have the same yearly salary of £19,760. However, Sam works reduced hours on a higher hourly rate than NMW and Jo works 40 hours a week on NMW. Their company’s pension scheme makes the statutory minimum contributions (5% from the employee and 3% from the employer).
As Sam earns above NMW, she is able to take part in a salary sacrifice pension arrangement. Each month, Sam contributes £82 into the pension and the employer puts in £49. Sam takes home an extra £10.86 per month, too, after saving on NI contributions. Although this may not seem like a huge amount, that’s £130 a year that could be used for birthday or Christmas presents, a meal for the family, or even saving towards a holiday.
If Sam’s employer were to add their savings to Sam’s pension pot as well, that’s an extra £12.35 a month. So Sam’s total pension contribution with salary sacrifice could be (with employee contribution, employer contribution and extra top up from NI savings combined) £143.
Jo also contributes £82 into the pension each month and the employer contributes £49. As Jo is not eligible for salary sacrifice, he misses out on the £10.86 each month and the extra £12.35 in employer contributions in the pension pot.
Another way of looking at the discrepancy is working out how much it costs the two employees to save the same amount into their pension. If Sam’s employer shares the cost savings, every £100 that Sam saves gets topped up by £15 of employer contributions. That £115 in the pension pot has actually only cost Sam £66.75 (after income tax and NI tax relief are taken into account). Whereas for Jo, £100 saved into the pension would cost £80. And there would be no extra employer top up, either.
What can be done?
NMW is a great concept: it helps make sure workers are being paid properly and fairly across the board. However, it doesn’t make logical sense that NMW earners are barred from salary sacrifice; although the wage is lowered on paper, because of the NI savings, the employee is actually taking home more pay than they would have otherwise.
Sahil agrees. “Salary sacrifice is both legal and widely used by large companies to give their employees extra cash in their pockets and in their pensions. Adjusting employment law to allow NMW earners to take part in salary sacrifice, as long as they are not disadvantaged, simply makes sense. Everyone should have the chance to access some extra money to spend on essentials or even those things that make life brighter, as well as saving a bit more for tomorrow. In this era of rising living costs, this simple change could help up to two million people get more financial security.”
We can only hope that the legislation is revisited and more people are able to take advantage of this opportunity.