From 6 April 2022, Employment Taxes increased by 2.5%, by way of an increase to National Insurance Contributions (NIC) shared between employers and employees. This means that many employees will see a reduction in their take-home pay, and employers will also face higher National Insurance costs.
From April 2022:
- For Employers, the effective NIC tax rate increased from 13.8% to 15.05% of an employee’s earnings.
- For Employees, the effective NIC tax rate increased from 12% to 13.25%. (Class 1, and subject to minimum and relevant NIC thresholds)
The Federation of Small Businesses has warned that the total cost to the small business community could be in the region of £5.7 billion. Here we look at what impact adopting a salary sacrifice arrangement could have on both the employee’s and the employer’s tax and NICs, and the potential cost savings.
What does salary sacrifice mean?
Salary sacrifice, also known as salary exchange, happens when an employee gives up or “sacrifices” part of their cash remuneration e.g., salary or a bonus due under their contract of employment, in exchange for a non-cash benefit. Most commonly this is a corresponding payment into a registered pension scheme, but it can include other permitted benefits such as cycle to work schemes etc.
What is the main benefit of a salary sacrifice arrangement?
Rather than make personal pension contributions in a conventional manner, under a salary sacrifice arrangement, an employee agrees to exchange part of their salary (equal to their personal pension contribution) in return for an additional employer pension contribution to the same value.
Unlike salary payments to employees, employer pension contributions attract no Income or NIC tax. Therefore, by changing the method in which personal pension contributions are made, tax savings are generated by both the employer and employees.
How could this assist with the National Insurance increases?
By introducing salary sacrifice for employee pension contributions, the resulting savings in light of the increases in National Insurance could be significant. For employees, this reduces the net cost of saving into a pension – a clear benefit amidst cost-of-living challenges. Employees could even choose to rebate these tax savings into a pension, boosting their long-term savings pot. For employers, implementing salary sacrifice could result in significant savings on their NICs thereby offsetting some wider repercussions of the NICs increase.
How can you set up a salary sacrifice scheme?
There are several requirements that need to be met to ensure that the pension salary exchange arrangement is set up correctly and deemed compliant in the eyes of HMRC and The Pension Regulator. Any mistakes will have costly ramifications.
A salary sacrifice arrangement involves a change to terms and conditions of employment, so it is necessary to obtain express employee consent and record this in writing. It is important for employers to also be aware of HMRC's guidance on varying employment contracts as well as any other technical aspects of the arrangement, to ensure that the scheme complies with HMRC requirements. Employers also need to consider whether they will use pre or post-salary sacrifice pay to calculate company sick pay, overtime etc. and make sure employees are clear about their entitlements.
Please get in touch with your usual 3CS contact for further information.