National Minimum and Living Wage increases from April, alongside the rise in national insurance contributions (NICs), mean employers need to ensure they’ve planned for the changes. One approach to mitigating the impact, that will work for both employers and employees, could be a salary sacrifice arrangement.
The high rate of inflation expected for 2022 – current forecasts predict the level will go above 7% – will also have an impact if employees aim to negotiate salary settlements that protect their level of remuneration in real terms.
National minimum and living wage
From 1 April 2022, the hourly rate of National Living Wage that must be paid to workers aged 23 and over has gone up to £9.50 – a 6.6% increase, equating to extra annual salary of at least £1,000. Apprentices and those aged 21 and 22 have also benefited by inflation busting increases, with their National Minimum Wage rates increasing 11.9% and 9.8% respectively.
- The National Living Wage rate going up nearly in line with the expected rate of inflation puts pressure on employers to match this when it comes to settlements higher up the salary scale.
- Small and medium-sized businesses, in particular, could find the higher rates of minimum pay a strain on their finances.
Real living wage
The real living wage is independently calculated to reflect the cost of living. Although entirely voluntary, nearly 9,000 employers now pay this rate of pay. The most recent increase recommends an hourly rate of £9.90. There is a separate London rate of £11.05.
The latest National Living Wage increase has nearly brought parity outside of London, but London-based employers may face demands to pay more.
National insurance contributions
Higher paid employees will see a big drop in their take-home pay from April following the 1.25 percentage points increase to the rate of NICs, even though the starting threshold is going up. For example, someone earning £100,000 annually will have take-home pay of nearly £91 less in April compared with March but an increase of nearly £32 in July compared with June. July is when the starting threshold will see another, more substantial, raise to match the personal allowance at £12,570.
- Employers will also see a broadly similar increase in what they have to pay (with no reduction from July), and this is going to be expensive if there is a team of highly paid personnel unless costs can be passed on to clients.
- Make sure additional costs are reflected in financial projections.
The higher rates of NICs make salary sacrifice arrangements more attractive than ever, especially regarding employer pension contributions. A company car salary sacrifice arrangement also works well for full electric and certain hybrids.
A typical arrangement might mean an employee – earning £75,000 a year – sacrificing £5,000 of their salary, with the employer then contributing this amount into the employee’s pension scheme. The employee saves over £2,150 in tax and NICs, with the employer saving more than £750 in NICs – so a win-win situation.
Salary sacrifice will not, however, suit everyone. For lower-paid employees, a salary sacrifice arrangement cannot reduce normal earnings to below the rate of National Minimum/Living Wage.
Higher paid employees need to be aware that a lower base salary will normally mean a lower level of potential mortgage borrowing; a real problem given current property prices.