As you may be aware, the government will increase National Insurance Contributions (NIC) by 1.25% from 6th April 2022.
One option available to you to help offset NIC, both now and in the future, is to set up “salary exchange” within your workplace pension scheme.
One of our Financial Planning Consultants, Ricky Clark, has created a 10-minute video to explain the upcoming NIC changes, what salary exchange is and how this can benefit both the employer & employees, and the things your business needs to think about before implementing salary exchange.
Have a watch below and if you have any questions about salary exchange and would like to get in touch with our team, please contact us at email@example.com or call 01382 200055.
*Edited video transcript*
Hi, I’m Ricky Clark, a financial advisor with Henderson Loggie Financial Planning Limited. Within this short video, I’m going to cover how the use of salary exchange within your workplace pensions can help reduce National Insurance Contributions for your business and your employees.
The rise of National Insurance Contributions
So firstly, let’s have a look at the issues we face in the coming tax year 2022/23 and it’s the rise of National Insurance Contributions. These will rise by 1.25% for employers, employees, and the self-employed. Now, the reason the government introduced the rise to National Insurance Contributions was in order to help plug the gap for health and social care costs and also the backlog of NHS work due to the COVID crisis. The 1.25% is going to be legally ring-fenced for this purpose.
So how’s it going to impact you as an employer? Well, you already pay 13.8% National Insurance Contributions above a specific band of earnings and this will rise to 15.05%. For employees below the higher-earning threshold, this will rise from 12 to 13.25%, and those earning above, 2 to 3.25%. So firstly, we would note that this is a significant rise as a percentage value and it is certainly now the time to think about ways in which we can mitigate these increasing costs.
Regardless of what happens in the following tax year, from the 6th of April 2023, the 1.25% health and social care levy will remain in place. It is likely, although not confirmed, to be split back out of the National Insurance Contribution payment as we know it and again, will be protected for the health and social care costs. We envisage that this will likely show in two payments within an individual’s payment slip from that point in time. However, at this stage, the government have not confirmed anything and it could indeed go up the National Insurance Contributions level anyway, regardless of them splitting it back out.
Tip the scales back
So how can we tip the scales back and favour ourselves? Well, simply put, focus on our workplace pensions. Every employer in the UK with employees has a pension in place to enrol their members of staff into. The first thing you should be doing is reviewing the way in which the pension contributions are made towards your pension. The three main types of pension contributions that can be made are relief at source, which is the most commonly used method and this is where an individual’s percentage is deducted after they have paid tax and national insurance on their full wages. The net pay arrangement is taken before tax is paid but this is more used with occupational pension schemes.
Today, I’m going to focus on salary exchange, which is an additional option that you can add within your pension set up to mitigate the rising National Insurance Contributions and also to help your employees have a better financial position
What is salary exchange?
Simply put, salary exchange (also more commonly known as salary sacrifice) is an agreement between you and your employee. What you’re effectively doing is the agreement between you and your employee means that the percentage that they are currently paying towards their pension is taken before tax and national insurance is deducted. Therefore, a total payment to an individual’s pension would be an all employer contribution. Let’s see how this can benefit you and the employees.
What are the benefits of a pension salary exchange scheme?
So first of all, I’ve already covered that by changing to salary exchange, both you and the employees save on National Insurance Contributions. You, as an employer can reinvest these National Insurance Contributions any way you would like, whether that’s retaining them for future use in the business, paying them back into individuals’ pension to boost their future pension savings, or even possibly putting in a group life assurance in place to enhance your overall pension and employment package. Employees can either get a higher take-home pay or a better pension contribution and the benefit to the employees is that their longer-term outlook would improve if the National Insurance Contributions were paid back into their pension plan.
So there are really good benefits for both sides of the fence here. One in particular point it’s always worth high highlighting is if you have higher earners in the relief at source method, they only receive basic rate tax relief so by changing to salary exchange, because it’s been taken off before they pay tax and national insurance, they receive higher rate tax at their highest rate national insurance savings and they don’t need to do a tax return to claim it, which they would need to do when they’re not using salary exchange.
So to illustrate this to you, we have used Lucy, sorry, Linda, and she has an annual salary of £30,000 paying 3% from the business. Linda also contributes 5% herself, which is £1500 and we’re using the current tax year to make sure that we’re working on today’s figures.
So how does this look? Linda agrees with you, as the employer, to reduce her annual salary by £1500 resulting in a gross annual salary of £28,500. Because of this reduction, Linda’s gross salary reduces and therefore she is paying less National Insurance Contributions to a tune of around about £180 per annum, and this is the point I was making in the previous slides is that this could either be used in a take-home pay, or my preference would be to put it into the pension for better future outcomes.
With the reduction to gross salary, you as a business would save in the region of £207 and again, you have the control over how you would like to invest this.
Employer savings potential
If we take it a step further and you had 30 employees on the same average salary paying the 5%, if you look at the table in the current tax year, the savings that you could potentially make, if everybody joined is £6210 and casting forward to when National Insurance Contributions rise, you’d make even better savings. Regardless of the change from the 2023/24 tax year, when the National Insurance Contributions will again split, there are still significant savings to be made going forward in the years to come.
Implementing Salary Exchange
So let’s think about how you would implement salary exchange. There are lots of moving parts and it’s really important to have a good plan in place. I’ll go through these just to give you a little bit more insight. You want to have a look at how you could make savings and what impact implementing salary exchange could make, what employees would benefit from joining, you know your staff and employee makeup, you may have low earners or part-time workers that don’t suit salary exchange but maybe you have higher earners, managers and directors that could fit it. You can arrange it in whatever way it would fit your business.
Make a clear plan on how to implement it. You’ll need to notify your pension scheme of any changes to ensure that it can change and is done so in time. Payroll is an integral part of this process and it’s important they also understand the changes you would be planning on making. Communication with employees is the most crucial so they understand the changes that would be coming up, how it will impact them and how it can improve their position and then of course not forgetting you’d need to create an appropriate employer and employee agreement which is stored within their HR records to show that they were happy to make the adjustment.
That was a whistle-stop tour of how you can help with the National Insurance Contribution position within your business and I’m delighted to say within Henderson Loggie Financial Planning and Henderson Loggie Chartered Accountants, we can help you in all these areas I’ve named within this final slide. We’d be delighted to hear from you so please get in touch and we can have a chat about how we can help with your salary exchange and the saving of National Insurance Contributions.