Using salary sacrifice to help mitigate National Insurance contributions
Salary sacrifice arrangements have historically been beneficial in saving tax, NICs or both. Unfortunately, the government clamped down on salary sacrifice starting April 2017, and now there are only limited applications of such arrangements.
One of those is in connection with workplace pensions. In line with auto-enrolment, most employers are required to provide access to a workplace pension scheme, and as a result, both employee and employer contributions are typically made (although some non-contributory schemes do exist).
Employer contributions are made gross, but with employee contributions, differing arrangements arise, which, although they always provide for full tax relief, do not, by default, provide for NICs relief.
The typical structures in place are as follows:
Basic rate taxpayer
- Employee pays 80% of the contribution from net pay.
- Pension scheme claims back balancing 20% from HMRC directly.
- No NICs reduction/saving.
Higher/additional rate taxpayer
- Employee pays 80% of the contribution from net pay.
- Pension scheme claims back balancing 20% from HMRC directly.
- Employees must personally claim extra tax relief of 20% / 25% from HMRC.
- No NICs reduction/saving.
Salary Sacrifice arrangement
- Employee pays 100% of the contribution from gross pay.
- Contribution added to employers and sent as one payment.
- The pension scheme does not claim any tax relief from HMRC.
- Employee receives tax relief at source, at the highest rate - no claim to HMRC.
- Employee saves NICs (13.25% / 3.25%).
- Employer saves NICs. (15.05%).
By way of example, a basic rate employee who contributes £1,200 p.a. could save £144 in NICs, which would be seen as a direct increase in net pay. The employer would save £166, and this is all by switching into a salary sacrifice arrangement using the same contribution levels. The employer's savings may also be used in part or whole to make an additional ‘top-up’ contribution to the employee pension scheme.
In terms of scale, a salary sacrifice arrangement could provide significant savings and more so with the new levy increases. The following table illustrates typical savings, all per year.
Savings table
| Employees | 1 | 10 | 50 | 100 | 1000 |
| Employer saving | £166 | £1,660 | £8,300 | £16,600 | £166,000 |
| Employee saving | £144 | £1,440 | £7,200 | £14,400 | £144,000 |
Conclusion
It is important to note that salary sacrifice isn’t for everyone, and an employee’s personal circumstances may prevent or sway them away from agreeing to switching over. But for the majority of employees, the benefits remain positive; an increase in take home pay, while preserving existing pension contributions.
As can be seen, pension salary sacrifice arrangements can generate a saving in terms of NICs.
The Employment Tax team at Crowe have significant experience in assisting clients with implementing such arrangements.
If you would like to discuss this further, please get in touch with your usual Crowe contact.
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