The increase to National Insurance contributions (NICs) in April 2022 will trigger a review of pay and benefit costs and encourage a higher uptake of salary sacrifice arrangements.
What is the benefit?
Your employees will already be saving into a workplace pension scheme. With the correct implementation and internal communications around salary sacrifice, your employees can mitigate the cost of this on their take home pay from April 2022.
How does salary sacrifice work?
Salary sacrifice is the exchange of salary for a non-cash benefit, such as additional pension contributions. You can use salary sacrifice for other
non-cash benefits too, such as cycle to work or a company car.
If employees are paid a bonus, they can also sacrifice some or all of the bonus for extra pension contributions. The advantage of salary sacrifice is that employees will save on tax and NICs and from an employer perspective, you will save on employers’ National Insurance as well.
The savings come from the exchange of salary for pension contributions before the employee is taxed on their earnings.
Traditional pension contribution basis versus salary sacrifice ‘exchange’
Position from April 2022
Following the introduction of a 1.25% employee and employer increase to NICs.
For an employer with 200 employees:
- The potential saving to employees is £39,750
- The potential saving to the employer is an additional £45,150
These figures are based upon the assumptions above and the employer saving may be retained or used to enhance the overall employee benefit arrangements.
The key to any successful salary sacrifice is in its implementation, both in respect of the salary sacrifice agreement itself and considering the wider impacts of such an agreement. Salary sacrifice is a contractual change to an employee’s terms and conditions and so will need to be documented appropriately.
Care also needs to be taken in respect of earnings related benefits, such as death in service and critical illness policies, overtime rates etc as these will be based on the appropriate definition of earnings. For lower paid employees the sacrifice must not bring any employees below national minimum wage and national living wage pay levels.
Where a sacrifice has not been successfully implemented then the NIC savings can be lost, and tax relief on the pension contributions themselves may be at risk.
The above should not though be seen as a barrier to implementing a salary sacrifice scheme and where implemented correctly then the savings to both employee and employer can be substantial.
If you have any questions on employment tax, please get in touch with us.