Using salary sacrifice to help mitigate planned National Insurance rises

At the time of writing, the government has confirmed it will go ahead with the planned rises in National Insurance Contributions (NICs) from 6 April 2022.

Nearly all classes of NICs will rise by 1.25% to fund the new Health & Social Care Levy. For the tax year 2022-23, this levy will be collected by a temporary rise in NICs but from 6 April 2023, the levy will become a standalone deduction and NICs will revert back to original levels.

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 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.
• Employee 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.
• Pension scheme does not claim any tax relief from HMRC.
• Employee receives tax relief at source, at 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 £159 in NICs, which would be seen as a direct increase in net pay. The employer would save £181, and this is all by switching into a salary sacrifice arrangement using the same contribution levels. The employers saving may also be used in part or whole, to make an additional ‘top up’ contribution into 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

Assumes basic rate taxpayers, £1,200 p.a. contributions

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 and this is even more important to help mitigate an element of the Health & Social Care Levy.

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 contact your usual Crowe contact.