What the changes in National Minimum Wage and National Insurance mean for employers and employees

From April 2024, the NLW rate will be extended to include workers aged 21 and over (previously aged 23 and over), and therefore workers who were being paid at the minimum amount for their age will see an increase in their pay (increasing to £11.44 per hour).

For example,

• A 23-year-old worker, working 37.5 hours per week and paid at NLW rates, will see an increase of over £1,900 (before any other interactions or adjustments) in their annual pay – an increase of 9.79%.
• Workers aged 21 and 22  will see an even bigger increase of over £2,400 – an increase of 12.38% and for those workers turning 21 on 1 April 2024, a bigger pay increase of 52.74% - in gross cash terms (before tax and NIC is deducted), of over £7,700 per annum, compared to what they are currently entitled to receive as a minimum.

Not only that, from 6 January 2024, these workers will also benefit from a reduction in their NIC contributions, with the main rate cut from 12% to 10%.

It is also important to consider the interaction with pension scheme costs and participation, particularly in view of auto-enrolment contribution levels and the usage of Pension Salary Sacrifice arrangements.

Essentially – great news for employees/workers but not so great for employers.

Getting into the detail – what does this practically mean for the employee and employer?

To help, it is best to look at some scenarios so that we can understand the practical impacts of these announcements. We set out a few scenarios to illustrate what these changes mean for both employee and employer when comparing 2023-24 to 2024-25 salaries (all examples are based on a 37.5 hour working week for one employee, calculated in line with the tax year, April to March and factor in the 2% employee NIC reduction from January 2024: -

Scenarios

What about employees already paid above the NLW/NMW rates?

The above examples demonstrate the additional costs for some workers paid at the NLW rates, however, what about those who are already paid above the NLW rates? Just because they are already earning above the NLW rates doesn’t mean that there are no further costs to consider. In addition, maintaining pay rates across the whole workforce in line with the 9.79% increase to the NLW can be a hard act to follow when many businesses are already struggling to absorb additional costs and maintain their profits.

Another consideration is where employees are currently participating in salary sacrifice schemes. Whilst pay rates may currently be above the minimum rates payable, come April 2024, they may find that they can no longer remain in such schemes, unless pay increases are sufficient to cover the amount being sacrificed. If this is not a viable option, employees may find that they are removed from such schemes, resulting in a loss of savings to both employee and employer and removing access to a very welcome benefit that lower paid employees benefit from the most.

For example, an employee currently paid £10.90 per hour for 37.5 hours per week, earns an annual salary of £21,255 and can comfortably contribute 3% into a pension salary sacrifice scheme (hourly pay rate would reduce to £10.72 per hour). However, from April 2024, this individual would need a pay increase of at least 8.16% to a salary of £22,990 to maintain minimum wage compliance at £11.44 per hour and remain in the pension salary sacrifice scheme.

What can employers do?

As highlighted above, employers may need to consider restructuring their reward offerings and look at alternatives to attract new recruits and retain loyal employees where they cannot afford to offer pay increases, aligned to the minimum wage rate increases, of around 10% across the board such as:

•  Implementing Pension Salary Sacrifice for both employee and employer NIC savings.
•  Offering other salary sacrifice schemes that are attractive to employees, such as holiday buy, EV (Electric Vehicle) etc.

Other arrangements to consider to help create reward differentials include the following: 

• Discount schemes for shopping, restaurants etc.
• Share options.
• Tiers of holiday and pension contribution depending on seniority and years’ service.
•  Increased cover for medical benefits, life assurance etc.
• Provision of company mobile phones/iPads for work purposes.
• Utilising hybrid working and paying the £26 per month tax/NIC home working allowance.
• Providing free food/drink at the canteen/in the office utilising the tax/NIC free exemption available.

Structuring these correctly will help towards some retention of reward differential across the organisation to demonstrate what a promotion means to someone from a reward perspective.

In addition to looking at what they can offer their employees, employers also need to remain compliant with the NLW rules and therefore may need to review their salary sacrifice scheme eligibility – the NLW/NMW rate increases and eligibility to the NLW being lowered to employees aged 21 from April 2024 means that any thresholds currently in place may not be sufficient come April 2024. In addition, employers may wish to re-communicate the potential savings offered by a salary sacrifice scheme to participants, due to the reduction in employee NIC and update any company policies/FAQs on this subject.

If you would like to discuss any of the issues raised in this article, please get in touch using the details below.

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