There is currently significant HMRC activity focussed on enforcing the NMW, with new enquiries being opened on a regular basis. Enquiries are often onerous to deal with and logistically complicated to respond to, with detailed information requests being issued by HMRC covering multiple years.
Compliance with the NMW regulations can often be complex - compliance extends far beyond ensuring that at least the headline rate is paid. We have provided some illustrative examples below of some potential pitfalls that could apply in 2024.
Example 1: Salary sacrifice
Salary sacrifice reduces pay for NMW purposes. Pay net of salary sacrifice must be at least equal to NMW.
An employee working 40 hours per week for an annual salary of £25,000 contributes 5% to their pension via salary sacrifice. This arrangement breaches the NMW regulations as their reduced salary is £23,750, which is less than the NMW entitlement of £23,796 (for the year commencing 1 April 2024).
Employers will need to review their salary sacrifice arrangements for both hourly paid and salaried employees and implement strong controls to ensure that they are compliant with the new NMW rates.
Example 2: Time off in lieu (TOIL)
The concept of TOIL is not recognised within the legislation meaning that entitlement to payment for hours worked can arise at the point they are worked.
An employee works 40 hours per week and receives an annual salary of £24,000, which is just over the minimum entitlement of £23,796 under the NMW regulations.
In the final month of the employee’s calculation year for NMW purposes, there is an exceptionally busy period and the employee completes 30 hours of overtime over the month. It is agreed that this can be taken as TOIL over the next three months, and is taken by the employee three months later.
This scenario gives rise to a potential NMW breach, as under the NMW regulations the employee is entitled to be paid for all the hours actually worked during the calculation year at the prevailing NMW rate. When the 30 hours overtime is added, the employee becomes entitled to £24,138.40, leading to an underpayment.
TOIL is therefore an area of risk and employers will need to review their TOIL arrangements to ensure that they are compliant with the NMW legislation.
Example 3: Recording of working time
Tracking, recording and evidencing time worked by employees has always been crucial to satisfy HMRC that NMW is being paid. The tracking of time for salaried employees is predicted to take on increasing importance for many businesses.
An administrator works 40 hours per week in exchange for an annual salary of £26,000. They pay 5% into their pension under salary sacrifice, giving a net salary of £24,700. In practice, the administrator regularly works on average an extra 2.5 hours per working week (assume 46 working weeks as no overtime while on holiday). No overtime is paid in respect of this work as the employer does not formally monitor the hours of office-based employees paid a salary.
This overtime would put the employee below minimum wage as pay of £1,315.60 would be due in respect of the overtime and there is insufficient ‘buffer’ in the salary after salary sacrifice to absorb this overtime.
As shown by the examples, there are significant pitfalls within the NMW legislation and NMW compliance needs to be considered for employees historically regarded as being relatively ‘safe’ from breaching the legislation. As well as the above examples, a number of other risks need to be considered, such as deductions from pay, uniform policy, etc.
With penalties of up to 200% for any underpayments identified, as well as reputational damage when employers are named and shamed, there are significant costs to employers of breaching the NMW regulations. However, if you identify and self-correct any errors prior to an HMRC review being launched, you are likely to avoid penalties and being named. We strongly recommend employers proactively review their NMW obligations.
How can Evelyn Partners help you manage these risks?
- We can carry out a risk review for you and highlight where you can improve your processes and policies and if necessary, take corrective action prior to an HMRC review.
- We can advise you on your pay, benefits, and other contractual arrangements with employees to ensure that you are compliant with the NMW regulations and best practice to minimise risk and administration requirements.
- We can support you with responding to HMRC queries and investigations.
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By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.