By Angela Keery, Head of Tax
The pending rise in National Insurance contributions is arguably the most significant change to taxation we will see this year. Confirmed in recent weeks by the Prime Minister and Chancellor of the Exchequer, the increase will impact tax bills and pay cheques across the board at a time when rising costs and external factors are squeezing profit margins and disposable incomes to the extreme.
Announced last year as a taxation to help fund health and social care, National Insurance will rise by 1.25% from April 2022 for a year, before returning to current levels in 2023, when the standalone Health and Social Care levy will take effect. With increases for all individuals currently liable for National Insurance, the pressure this will place on both employer and employee has sparked significant concern, particularly at a time when the costs of both doing business and living comfortably have skyrocketed.
Though essentially unavoidable, ways to mitigate the increase and enjoy a reduced NI Contribution for both businesses and employees do exist, most notably in the form of a Pension Salary Sacrifice. In practice, this is an arrangement that enables employees to boost their existing pension contributions in order to save money. Changes to the rules around salary sacrifice did eliminate many of the tax savings available through employee benefits in 2016, however pension salary sacrifice remained in place, meaning it is now more beneficial than ever in the face of the looming National Insurance hike.
The basic mechanics of a salary sacrifice are that employees agree to a reduction in their future salary in return for the benefit of additional employer pension contributions paid to their pension. Based on the extent the salary is sacrificed in this agreement, businesses stand to save a considerable 15.05% in National Insurance contributions, including the latest 1.25% increase, while employees save an attractive 13.25%.
This saving can be shared between employer and employee in this format, or alternatively paid as additional pension contributions on the employees’ behalf, or also a combination of both. What’s important in following this route is that the agreement is reached explicitly between both employer and employee and set out within their terms and conditions that they are fully aware they are forgoing their contractual right to further cash remuneration.
A hugely tax efficient option, it is attractive to all parties given the current economic climate that shows no signs of letting up. Considering current difficulties for many businesses in terms of recruiting and retaining staff, it may prove a useful advantage going forward.
With the world of work altered forever, this route may also have more appeal among workers after two years of uncertainty that have undoubtedly prompted many to consider their security, financial stability and the pension pot that ultimately awaits them in retirement. Many have used this time to reconsider their priorities, and we are seeing more appreciate the value of small sacrifices now to build a healthy pension for the future.
It is often commented that only death and taxes are certain in life, and there is little preparation we can do for the former. Businesses can, however, make use of qualified and reliable business advice to ensure they are best prepared for the latter, and we know that options do exist to mitigate the upcoming rise in National Insurance.
While salary sacrifice is not suitable for every employee, it is a viable option that could ease the impact of the upcoming change on businesses operating in this post-pandemic climate. My advice is to seek input from advisors early and explore the options to ease the financial strain of this change on both your employees and your company accounts.
To discuss any aspect please contact Angela Keery, Head of Tax E: firstname.lastname@example.org or T: 028 9032 3466