Salary Exchange - Offset the rise in NIC Contributions

The government recently announced its intention to raise the rate of National Insurance Contributions (NIC) paid by both employers and employees, as well as increase tax on dividend income. Employees will see their NIC rise by 1.25% and Employers will see their NIC rise by the same amount, taking Employer’s NI from 13.8% to 15.05% from 6th April 2022. From April 2023, these increases are planned to be separated out from NIC to form a new Health and Social Care Levy. At the moment, workers over State Pension Age (SPA) do not pay NICs, but they will pay the new Health & Social Care Levy from April 2023.

Alongside the rise in NICs will be an increase on the tax applied to dividends of 1.25%. For owner-managed businesses, they will pay higher tax on their dividend income, higher NIC on their salary (if they take a salary over the Primary Threshold) and also have a higher cost relating to their employer’s NIC.

One of the ways to help mitigate this rise in NICs is through salary exchange on the workplace pension. Salary exchange (also known as salary sacrifice) is when an employee agrees to reduce their salary in ‘exchange’ for their employer paying that amount directly into their workplace pension. As the pension contribution is no longer going through salary, both the employer and employee save NICs.

For example, if a basic rate taxpayer ‘exchanged’ £100 per month from their salary, they would currently save 12% NIC on the amount (i.e. £12) each month, rising to 13.25% (£13.25) from next April. Their employer would currently save 13.8% (£13.80) in NICs, rising to 15.05% (£15.05) from April 2023. The employee can retain their NIC saving as a boost to their take-home pay and the employer can retain their NIC saving or pass some, or even all, of it back to their employees in the form of enhanced pension contributions.

In addition, business owners may wish to consider using company profits to top up their pension contributions through a single contribution, rather than paying this out as a dividend in order to mitigate the rise in dividend tax. If you would like to discuss how to introduce salary exchange for your workplace pension, please get in touch with Angela Ward angela.ward@theinkgroup.co.uk. Ink can provide template letters and documents to ensure the salary exchange complies with HMRC rules.