How to beat the National Insurance hike – Birmingham Post article 16.06.2022

Frozen income tax allowances and increased National Insurance (NI) mean taxpayers are paying more.

In fact, the tax burden is set to be the highest since the Labour government of the early 1950s, according to the Office for Budget Responsibility.

Nevertheless, there is a way of avoiding the worst of the hit.

Pension salary sacrifice can mitigate the rise in NI for both the employer and employee.

Web site Unbiased explains: “A salary sacrifice scheme is an arrangement between you and your employer, where you give up or ‘sacrifice’ a portion of your salary in exchange for other, non-cash benefits. These can be things like childcare vouchers or a company car, but the most popular type involves additional pension contributions from your employer.

“If you’re part of a workplace pension, you and your employer will contribute every month. The minimum your employer must contribute is three per cent, though they can choose to contribute more.

“One way to increase these contributions is via a salary sacrifice scheme. It means that contributions from your employer increase, except that they are really your own contributions, because your salary is proportionately reduced. However, the payments count as employer contributions, rather than employee contributions.

“Because your gross (pre-tax) wages are now smaller, you’ll pay less income tax and NI on your earnings. Your employer saves on National Insurance too.”

Take-home pay needn’t be any lower than if you were making the pension contributions yourself, because you choose how much salary to sacrifice.

Unbiased offers the following example.

“Jane has a salary of £35,000 a year and contributes five per cent into her pension, while her employer contributes three per cent. That means Jane is contributing £1,750 and her employer £1,050 for a total contribution of £2,800.

“Jane decides to sacrifice some of her salary, making her gross salary now £32,941. Her pension contributions stay at five per cent of this, but the sacrificed money is paid directly into her pension by her employer, who may also add on the savings made from lower employer NI contributions (NICs), and Jane also saves on NICs. This raises the total contribution to £3,392.94 – or £592.94 more than Jane’s pension would have received before.

“Jane’s annual take-home pay would be unchanged, at £26,040, but her pension would have much more going into it each month.”

Money Week adds: “By entering into a salary sacrifice scheme, you are reducing the amount of income on which you will be taxed.

“This is particularly valuable as NICs go up. For someone earning £50,000 a year, the 1.25 per cent NI increase will add around £200 to their annual bill for the 2022-2023 tax year. However, by using salary sacrifice to increase their pension contributions by £100 a month, they could wipe out around £160 of that increase, without reducing the total value of their benefits at all.”

There are downsides.

Buying property is one – a lower salary can reduce your mortgage options. It may affect some of your other earnings-related benefits as well, like if your employer offers life cover or income protection insurance. A lower salary could also reduce the statutory maternity/paternity pay you’re entitled to, since it’s calculated on your earnings.

There isn’t a specific limit to how much you can sacrifice. However, your reduced salary has to remain above the national minimum wage. You also need to bear in mind that you can only contribute a total of £40,000 to all pension savings annually.

Salary sacrifice is not just a great vehicle to improve retirement savings but a very tax efficient tool for both the company and individual.