April 2020 increase in employee’s NI threshold and NMW rates

Wed 12 Feb 2020

Alongside the scheduled UK changes to taxation of contractors (and the IR35 legislation), termination payments and electric cars, there are some more traditional updates to be mindful of. These concern changes to the national insurance (NI) thresholds for employees and changes to the rates for the national minimum wage (NMW) rules and the way the rules are operated.

National Insurance (NI)

Draft Legislation for increasing the Employee’s NI threshold to £9,500 from 6 April 2020 has been laid.  The Employers’ NI threshold is scheduled to increase to only £8,788).  This is the amount that employees and employers can pay before a NI liability arises.

The accompanying press release reiterates target threshold of £12,500.

National Minimum & Living Wage (NMW) rates and operation

The national minimum wage rates are set to increase from 1 April 2020.

Where a weekly paid worker’s pay period runs from 26 March to 1 April 2020 and the worker was paid on 1 April they, were entitled to at least the old rate of NMW. For pay periods starting from 1 April 2020 onwards, the worker is entitled to the new amount.  As the NMW rate of pay for a pay reference period is based on the rate applicable on the first day of that period, if the pay reference period runs from 30 March 2020 to 3 April 2020, the old NMW rates will apply to the whole of that period.

The Government has also announced a revised approach to NMW compliance and penalties.  As well as amending the rules for salaried workers to provide for a greater range of permitted payment periods, there is also some relief from penalties in certain cases where the cause of the underpayment is a salary sacrifice scheme or similar arrangements (see the annex to the policy publication).   The announcement comments:

“Additionally, the government has decided that employers offering salary sacrifice and deductions schemes will no longer be subject to financial penalties if the scheme brings payment below the National Minimum Wage rate…..The waiver will be subject to strict criteria – including that the worker has opted into the scheme. Deductions of NMW for uniform and other items connected with the worker’s employment will continue to be penalised.” 

 With respect to salary sacrifice arrangements this effectively means that:

• salary sacrifice arrangements like pension, childcare, cycle to work and voluntary deductions still reduce pay for NMW purposes and an employer would be required to make good the underpayment using the NMW rates prevalent in the year the underpayment is repaid (so it will cost more to make good post 1 April!); and
• Where an underpayment is identified HMRC will not levy financial penalties and will not include the business on the new “Name & Shame” list for this failure, providing certain conditions with respect to the salary sacrifice arrangement and the employer are met.
• Salary sacrifice schemes still need to have set eligibility controls to ensure those workers that could go below NMW are not included. 

This is particularly important for employers that offer a multitude of salary sacrifice and voluntary benefit arrangements as the cumulative reduction will need to be monitored, not each sacrifice in isolation.  It does provide a good window of opportunity for those with potential issues to put them right without the risk of penalties and being named by the Government. 

sets out the conditions for removal of penalties for NMW underpayments involving salary sacrifice as follows:

• The underpayment is due to either: (i) a salary sacrifice scheme (though not one imposed in connection with a worker’s employment); (ii) a deduction to pay for goods or services (unless this is an employer imposed requirements connected with the worker’s employment), or (iii) an amount deducted for a saving scheme, which will ultimately be repaid to the employee.
• The deductions from pay are not in respect of worker’s expenditure or their living accommodation.
• The worker has consented to the deduction.
• The worker has received the goods, services, benefits, or repayment of money under the relevant arrangement.
• The employer has not been: (i) convicted of an NMW offence; nor (ii) given a labour market enforcement undertaking (and is not subject to a labour market enforcement order); nor (iii) been served with a notice of underpayment relating to NMW in the previous six years, subject to deminimis and other conditions.

How we can help

We can help organisations review their compliance, assess how salary sacrifice has been operating and help enhance procedures to manage risk and maximise cost savings / employee take home pay. 

For a further discussion, please get in touch with a member of the Mazars Employment Tax team.