Reducing the Impact of the new National Insurance charge

Table of Contents
    Add a header to begin generating the table of contents
    Disclaimer: This article is based on legislation which was correct at time of publishing on April 19, 2022
    This page was last updated on September 21, 2023

    The 1.25% National Insurance increase has been well publicised ahead of it taking effect from April.  Whilst it represents only a modest increase in deductions for most employees, their employer is also hit by the charge as the employer NI increases by the same amount, making the total increase 2.5% on employment income.

    Over half the adult employees in the UK are now members of pension schemes and most of them will be paying their pension contributions from their after-tax earnings.    Whilst the tax suffered on the net income is effectively paid back to the employee, either by adding basic rate tax to the sum paid to the pension fund, or HMRC reimbursing the tax paid above the basic rate directly to the employee, there is no relief for the National Insurance suffered.

    A simple agreement by way of salary sacrifice between employer and employee can help mitigate part of this charge and leave the employee in the same position in terms of their net pay packet.

    Salary sacrifice is a legitimate and simple way to reduce National Insurance costs for both employees and employers. With Salary sacrifice the employer takes their employees’ workplace pension contributions from the gross salary before tax and National Insurance is calculated.  This way, both the employee and employer pay less National Insurance contributions.

    Although a simple step to take, it does require careful structuring. The correct legal paperwork must be in place for it to be effective, which your HR legal adviser should be able to help you with.

    Salary sacrifice requires an amendment to the terms of employment as the employee has to formally give up a proportion of their earnings in return for the employer taking on the liability for the employee’s share of pension contributions.  Whilst this may feel counter-intuitive it can be beneficial to both parties.

    Example

    Fred, a basic rate tax payer, has £100 per month deducted from his net pay to be paid into his pension fund.  His employer matches Fred’s personal contribution each month.

    Without Salary Sacrifice
    Cost to employer £272Added to employee pension pot£225
    Comprises:
    Pension contribution deducted from Fred’s net salary£100Employee contribution£100
    Pension contribution paid by employer£100Employer contribution£100
    Employee Tax on Gross Pay required to facilitate net pension contribution by Fred£30Tax claimed by pension fund£25
    Employee National Insurance£20
    Employer National Insurance£22

    Under a Salary Sacrifice arrangement adding the same £225 to Fred’s pension pot, and keeping his take home pay the same, the calculations become:

    With Salary Sacrifice
    Cost to employer £225Added to employee pension pot£225
    Comprises:
    Pension contribution deducted from Fred£0Employee contribution£0
    Pension contribution paid by employer£225Employer contribution£225
    Employee Tax on Gross Pay required to facilitate net pension contribution by Fred£0Tax claimed by pension fund£0
    Employee National Insurance£0
    Employer National Insurance£0

    In the simple example above the saving is £47 per month to the employer.  The potential saving is even higher if the employee earns more than £50,000, where the total cost to the employer for the same level of pension contribution would be over £300 before the salary sacrifice, reducing to £225 with the agreement, saving the employer £75 per month.

    This example assumes that the employee is left in the same position in terms of their net pay packet, but employers can structure the agreement so that the employee benefits from the whole of the savings made, and the employer is left in no worse position, or indeed any split that is mutually agreed between them.

    Whilst the sums in the example are small, when you consider the potential saving over the course of a year for even a relatively small workforce salary sacrifice becomes an effective financial planning tool for businesses. Salary sacrifice isn’t for everyone and an employee’s personal circumstances may prevent or sway them away from agreeing to switching over. But, for the majority of employees, the benefits remain positive; an increase in take home pay, while preserving existing pension contributions.

    Please give Paula a call on 01276 25542 if you require further information.

    Get in touch today
    If you would like advice and you are interested in our accounting services please call, email or complete our website contact form:

    Name*
    This field is for validation purposes and should be left unchanged.

    Google Rating
    5.0
    Based on 31 reviews
    js_loader

    Please take a moment to read our reviews on Google. If you have any feedback about our accounting services then we would be delighted to hear from you.

    Who we help at Butt Miller

    We provide many different businesses with outsourcing solutions to help make bookkeeping and financial reporting simple. Our outsourced finance function is backed by sector specific experts who sit behind the scenes, crunching the numbers and providing valuable advice and insight.

    We are able to offer support across a number of different industries ranging from:

    Scroll to Top

    This site uses cookies. Click here to view our Privacy Policy.