National Minimum Wage (NMW): Tribunal reverses savings club decision

Savings clubs can form part of a financial wellbeing offering within the overall employee value proposition and are often implemented at the request of employees to support their personal financial management.

In a ‘savings club’, participating employees voluntarily agree to have a fixed amount deducted from their net pay each month. Those funds are held by the employer, who repays the money at an employee’s request, or at a predetermined time (e.g. at the end of November in the case of Christmas saving clubs).

HMRC’s view has been that, although the salary deductions are voluntary, if savings club funds are held in a bank account the employer can access and use, the employer receives a benefit from the scheme. The NMW regulations state that pay deductions made for ‘the employer’s use and benefit’ reduce pay and, where HMRC successfully challenge that savings deductions fall within this regulation, it can result in an NMW underpayment. A number of employers challenged this, and the Employment Appeal Tribunal (EAT) decision supports some aspects of HMRC’s view.

In this case, an employer in the food manufacturing sector appealed against HMRC’s decision to collect NMW underpayments arising from pay reductions caused by savings club deductions.

The original decision on this issue at the Employment Tribunal (ET) in 2023 decided that, on the facts of this case, the deductions did not reduce pay for NMW purposes on the basis that any use and benefit for the employer was unintended (i.e. the deductions were not ‘for’ the employer’s use and benefit). However, HMRC appealed the ET’s decision, and the EAT held that the savings club deductions in this case did reduce participants’ pay for NMW purposes. 

The main points to consider are:

• The EAT judgment commented that the NMW regulations do not look at the intention behind the arrangements so that if the employer receives any ‘use and benefit’ from payroll deductions it will reduce a worker’s pay for NMW purposes; and
• The EAT also commented that the repayment of the savings to employees did not count as arrears of pay for NMW purposes.

The EAT’s decision was influenced by the fact that the employer could, in principle, access funds withheld from employees who participated in the savings scheme for its own use.

While HMRC may have applied the ET’s earlier decision, which was favourable to employers, during NMW compliance reviews (on the basis there was no intention for the funds deducted to be available for the employer’s benefit), this is unlikely to continue following the EAT’s decision.

Also, although this case concerned an employee savings scheme, in principle there is no difference between amounts withheld under a savings scheme, and those withheld from payroll for other purposes, that the employer could in principle access for its own use.

Employers should therefore review savings schemes to understand whether it could be argued that the deductions are for the employer’s own use and benefit (e.g. are the deductions being held in a bank account that the employer is able to draw upon if required?). They should also review other payroll deductions to confirm there is no risk that the deductions could be viewed as being for the employer’s own use and benefit (e.g. ensure that deductions being made are paid to third parties on time).

Please speak to your usual KPMG in the UK contact, or the NMW specialist authors, if you would like to talk through this case, or how our team of employment tax, legal and payroll experts can support you with NMW risk assessments, compliance, and remediation more broadly.

For further information please contact:

• Josiah Greenall
• Gareth Dennett