Save National Insurance by paying your staff’s pensions by Salary Sacrifice

National Insurance is increasing from April 2022

From April this year, most people and businesses will pay 2.5% higher National Insurance contributions. This table illustrates how contributions stand at present and how they will look after 1st April 2022, at the start of the new tax year.

Employee’s NIEmployer’s NI
From April 1st 202213.25%15.05%

What impact will this have on individuals’ take-home pay? Two examples – someone earning £20,000 will find themselves paying an extra £130 a year. Someone earning £30,000 will pay an extra £255 a year. The reason for these increases? To fund much-needed changes in the provision of social care. The government is planning that these increases will soften the impact of care bills. From October 2023, the most that anyone will have to pay over a lifetime for social care will be capped at £86,000.

Using salary sacrifice to pay pensions can help to offset the increase

Salary Sacrifice is when you agree to give up part of your salary in exchange for a benefit from your employer. An example might be making extra contributions towards your pension scheme.
The advantage for you as an employee – By reducing your salary, you’ll pay less in tax and National Insurance Contributions. The advantage to employers – They won’t have to pay National Insurance on the portion of salary that the employee is sacrificing.

salary sacrifice

What is the tax benefit of using Salary Sacrifice?

Let’s look at a basic rate taxpayer earning £30,000 in 2022/23

  • Without salary sacrifice – With their new NI Contribution of 15.05%, an employer must pay their employee £1,177 for them to earn £1,000. The employee then pays 20% tax and 13.25% NICs on the £1,000 (£332.50). This reduces their take-home pay to £667.50.
  • With salary sacrifice – If an employee earning £ 30,000′ sacrifices’ £1,000 of their salary in return for a £1,000 employer pension contribution, this saves the employer £177 in National Insurance. The employee would enjoy an extra £1,000 in their pension at a cost to them of £667.50.

Are there any drawbacks to the Salary Sacrifice approach?

It’s important to think carefully before leaping into the Salary Sacrifice option. There are potential negative outcomes. For example, if you’re applying for a mortgage or re-mortgage. By diverting part of your salary away from your take-home pay, your salary would reduce, and so, correspondingly, would the amount that lenders were prepared to let you borrow. Similarly, Maternity Pay, Statutory Sick Pay and other benefits could suffer in the same way. Also, If your employer provides life cover, you could lose a portion of life cover.

How is Salary Sacrifice arranged?

For you and your employer to set up a Salary Sacrifice arrangement, there has to be a formal arrangement.

  • Your contract of employment must reflect the new arrangement
  • Your contract must specifically identify both your lower salary and the benefit that you’ll be ‘buying’ instead.
  • The arrangement can’t be retrospective. It can only apply to future salaries.

Ask the tax experts

Salary Sacrifice is a perfectly legitimate way of mitigating the effects of the imminent increase in National Insurance Contributions. There are potential benefits for both businesses and their employees. However, there are also potential pitfalls. Opting for the Salary Sacrifice approach should only happen after taking expert advice. Here at AccountsCo, we’re UK Tax Specialists – here to help. So for expert guidance on Salary Sacrifice and all tax matters, get in touch.

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