Significant minimum pay rise may impact employer reward strategies

Employers may need to review their reward strategies!

With the proposal of the Low Pay Commission (LPC) for a significant rise in the National Living Wage (NLW) and National Minimum Wage (NMW), low paid employees are set to see rises exceeding 9%!

And the future prospect of seeing the NLW starting point drop to 21 years old, employers face an increasing paybill.

How does this impact reward?

Increasingly employers have embraced Optional Remuneration Arrangements (OpRA), the HMRC name for Salary Sacrifice and flexible benefit arrangements.

These work on a principle of an employee undertaking a contractual pay cut to receive an alternate free benefit from the employer.

They operate with a piece of jiggery pokery, smoke and mirrors, to reduce the amount of pay that may be subject to Income Tax and National Insurance at least for the employee. Recognised elements such as: Pensions, Childcare Vouchers, Bikes and Low emission vehicles can bring significant NI savings to employers too.

So what’s the problem with this rise and reward?

As a result of the significant rise to minimum pay rates, for large numbers of additional employees in the UK, they will be earning at or close to minimum pay rates!

The problem is that employers must not allow contractual earnings received to drop below minimum earnings levels as that breaches criminal law and could lead to significant employer difficulty with the government minimum pay enforcement agent, HM Revenue and Customs.

So there will be swathes of employees who have joined and benefitted from these reward arrangements who may no longer be financially eligible to participate.

What do employers need to do?

It would be wise for employers to make an assessment of their reward schemes and whether salary sacrifice arrangements are being operated. Then to assess the workforce earnings levels to assess the risks.

It may be that schemes need to close or be significantly adjusted. Some employee may already be members with certain resulting benefits having a life that extends beyond April 2023 when the new minimum pay rates apply.

Avoid the shock. It’s time to now start planning. Verify if there is an issue, explore the option and plan to eliminate or reduce the NMW non-compliance risk. After all, who want to be facing a potential criminal conviction. The underpayment bills could be significant along with resulting penalties.

Part of tax year 2023/2024 resources

IReeN.UK original from PAYadvice.UK 1/12/2022

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