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National Insurance increase: time to look at salary sacrifice

Wednesday October 06, 2021


Posted by Charles Ashwell on Wednesday October 06, 2021

By Charles Ashwell, New Business Development Director, Personal Group

Back in September the government announced that it would introduce a 1.25% Health and Social Care Levy, based on National Insurance contributions (NICs)*. This means that from April 2022, there will be a 1.25% increase in NICs for working age employees, the self-employed and employers.

From 2023, the health and social care levy element will then be separated out and the exact amount employees pay will be visible on their pay slips. It will be paid by all working adults, including workers over the state pension age – unlike other NICs.

What does this mean for employers?

Employers should note that the 1.25% rise in NICs for the 2022/23 tax year applies to NICs paid by both employers and employees. Overall, the levy is a 2.5% increase in the rate of tax on earnings (compared to an increase of 1.25% for self-employment income), although it is split between the employer and the employee.

The 1.25% increase in employer's NICs will be a real cost to employers, and should be factored in when considering anticipated expenditure from April 2022. As well as the obvious increase in the wage bill, the overall cost of other payments made to employees (such as bonuses) will similarly increase.

What about benefits?

We expect to see a surge of interest in salary sacrifice schemes as a result of the NIC increase. Naturally, employers are seeking to protect the value of their employee benefits package and employees want to put more money in their pocket.

Most larger UK employers offer salary sacrifice arrangements on staff pension schemes. It’s already popular as a way to incentivise employees to save more for retirement, but salary sacrifice could become an even more efficient way of making pension contributions, as this reduces the salary on which employee and employer NICs are paid.**

But pensions are just the tip of the iceberg for salary sacrifice. There are a number of different schemes which help employees’ pay go further.

Holiday trading - Holiday trading schemes allow employees to purchase extra annual leave by sacrificing part of their salary in return. This provides greater freedom and flexibility, and allows them to feel valued and trusted, whilst also saving the employee money on tax and insurance. Employers also benefit from this popular scheme by saving on National Insurance.

Technology benefit – Employees can access the latest home technology like TVs, laptops, and smartphones, and spread the cost through salary deductions. Read our blog 10 reasons to run a technology benefit for more information.

Cycle to work – Employees save 25-39% on the cost of a new bike, as well as spreading the cost over 12 months. A simple way to make commuting greener and healthier.

Car maintenance scheme - Spread the cost of MOT, service, repairs, or tyre replacements costs over 12 months and repay via salary.

Car benefit - Exchange a portion of salary in return for a brand new, fully maintained, and insured car. 

Travel Scheme - Spread the cost of a holiday over the year and repay via salary with no financial checks.

Employers should bear in mind that a salary sacrifice arrangement is not a perfect solution for everyone as it does lower your income, which might affect a mortgage application and state benefits. Employers must ensure that National Minimum Wage is still paid, and usually employees are only able to make changes to a salary sacrifice arrangement once a year or when you have a life changing event.

But with so many savings to be made, it’s worth reconsidering the benefits you currently offer employees and whether expanding your range of salary sacrifice schemes could help mitigate the NIC increase for both parties.

Employees are expecting more from their employers, and with wage inflation, increases to National Insurance costs and a shortage of talent, employers are having to be more flexible and imaginative in their provision of benefits.

For more information, email or call us on 01908 605000.

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While every effort has been made to ensure the accuracy of the information contained in this article, please note that Personal Group are not tax advisors. For more information, please refer to HMRC web page on National Insurance for employers.

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