National minimum wage increases could lead to salary exchange risks

Businesses need to be aware of the forthcoming increases to the National Minimum Wage (NMW) rates, as they may mean adjustments are required for some employees.

From 1 April 2025, the National Living Wage (NLW) rate – applicable to employees aged 21 and over – will rise by 6.7%, from £11.44 to £12.21 per hour, with higher percentage increases to the lower age-related National Minimum Wage (NMW) rates.

Any employers that operate salary sacrifice schemes (e.g., Pension Salary Exchange, Cycle to Work, Childcare Vouchers, electric company cars) must ensure that all employee post-sacrifice salaries do not fall below these new NLW/NMW thresholds.

As an example, an employee aged 21 or over, on a contractual 37.5 hour working week, will need to be paid a minimum annual salary of £23,810 to meet the new £12.21 hourly rate from April. If that employee is part of a Pension Salary Exchange scheme (reducing gross salary by 5%), their annual gross salary would need to be £25,063 (or £12.86 per hour). If an employer operates a Qualifying Earnings (QE) pension scheme, that hourly rate drops to £12.69 per hour (as only earnings between the £6,240 lower and £50,270 upper earning thresholds are pensionable under QE).

Below is an overview of the effective hourly rates for NLW/NMW purposes when considering Pension Salary Exchange (PSE) – taking a 5% employee contribution/sacrifice as an example:

*For those making higher percentage contributions under PSE than the typical default 5%, these hourly rates will increase. The lower NMW rates (those aged under 21) also need to be considered to ensure compliance with regulations.

Azets are here to help

If your staff are comfortably above the new NMW rates, it’s unlikely your business will have any risk and subsequently no changes will be needed. However, if you believe there may be some staff members at risk of falling below NMW from April, please get in touch with your usual Azets advisor or a member of our specialist Employer Solutions team. We would be happy to review the position, perform the necessary calculations and advise as needed.

It’s important to note that this article is focused on the NMW compliance risks in respect of salary exchange schemes and reductions to gross pay. There are many other ways NMW non-compliance can occur (including net pay deductions, time recording systems, unpaid overtime workers etc). If you have any questions or concerns, please get in touch with