Payroll savings schemes are often introduced to support low-paid staff with financial wellbeing, but recent case law confirms that even voluntary schemes can result in unlawful National Minimum Wage (NMW) underpayments, particularly where deductions remain under employer control. Without careful structuring through independent arrangements and robust payroll safeguards, these schemes pose significant legal, financial, and reputational risks despite their well-intentioned aims.
Below we explore in detail the risks and how these could be minimised.
The Christmas period and wider holiday season place predictable financial pressure on employees paid at or near the NMW or National Living Wage (NLW). Seasonal costs such as childcare, travel, energy bills climb, and social obligations multiply, together with meeting normal everyday expenses could lead to greater reliance on high-cost credit, increasing financial stress rather than alleviating it.
In response, employers increasingly promote payroll savings schemes (PSS) as a wellbeing initiative, allowing staff to save small amounts directly from their wages. While well-intentioned, these schemes can expose employers to significant legal, financial, and reputational risks If poorly designed.
Payroll Savings Schemes: Benefits and Hidden Risks
Payroll savings schemes are typically intended to smooth out income, reduce dependence on debt, and encourage financial planning. However, the minimum wage framework is strict. Under the National Minimum Wage Act 1998 and the National Minimum Wage Regulations 2015, many deductions whether voluntary or clearly for an employee’s benefit can still reduce pay for NMW purposes below the relevant hourly rates of pay of the worker.
Consequently, where this occurs good intentions offer no protection.
Legal precedents and HMRC enforcement
Recent case law illustrates how rigorously the rules are applied by both HMRC and the Courts.
In Iceland Foods Ltd v HMRC, the employer operated a voluntary Christmas savings club. The amounts deducted from employees pay were placed into a ring-fenced company account, the funds collected could be repaid to the employee on request. Although the Employment Tribunal initially found no breach in the NMW/NLW regulations had arisen, the Employment Appeal Tribunal overturned that decision.
The decisive factor was over the issue of control:
because the employer retained control of the funds, the deductions were treated as being available for the employer’s “own use and benefit,” reducing pay for NMW purposes regardless of the scheme’s voluntary nature.
A similar conclusion was reached in Middlesbrough FC v HMRC, where voluntary deductions for staff season tickets was found to reduce pay for NMW purposes.
Most recently, Lees of Scotland Ltd v HMRC (2024) reinforced this approach. Under the Lees case the savings deductions were paid into the employer’s business account, again the Court ruled the deductions were for the employer’s benefit, resulting in NMW underpayment. The judgment closely mirrors Iceland Foods and confirms HMRC’s consistent enforcement position.
Together, these cases demonstrate that payroll deductions affecting low-paid staff carry a high compliance risk, particularly in sectors with variable hours or seasonal work patterns.
Consequences of Non-Compliance
The consequences of NMW non-compliance can be punitive. Where HMRC identifies underpayment, employers may face:
- Retrospective pay reviews going back up to six years, with arrears recalculated at current NMW rates
- Financial penalties of up to 200% of arrears (capped at £20,000 per worker)
- Public “naming and shaming” by HMRC
- Damage to staff trust, industrial relations, and trade union relationship
- Increased audit, regulatory, and governance scrutiny
- For public sector bodies and publicly funded institutions, reputational and governance consequences may be as significant as the financial cost.
Mitigating Legal and Financial Risk
- Payroll savings schemes can be implemented safely, but only with careful design and strong governance. Key safeguards include:
Avoiding salary sacrifice arrangements for low-paid staff - Using genuinely independent third-party providers or trustee structures rather than employer-controlled accounts
- Considering properly documented loan or pay-advance models
- Building automated payroll controls to prevent deductions reducing pay below NMW, particularly where hours vary
- Applying contribution caps and eligibility criteria for staff close to NMW thresholds
- Conducting regular compliance audits, especially ahead of annual NMW and NLW uplifts
- Ensuring participation is genuinely voluntary and supported by clear, non-coercive communication
- Aligning savings initiatives with fair pay strategies, so they complement rather than compensate for low pay
Governance and Reputational Considerations
An HMRC finding of underpayment arising from a wellbeing initiative can seriously undermine staff confidence, trade union relationships, and institutional credibility. Minimum wage compliance should therefore be integrated within broader governance, risk management, and internal control frameworks, rather than treated as a narrow payroll issue.
Conclusion
Payroll savings schemes can play a positive role in helping employees manage predictable seasonal financial pressures. However, recent case law makes one point clear: the minimum wage regime is strict, highly technical, and indifferent to good intentions. Safe implementation demands careful scheme design, genuinely independent structures, and rigorous payroll controls. When aligned with fair pay principles and strong governance, payroll savings schemes can support financial wellbeing without exposing employers to legal, financial, or reputational harm.
