How Pension Salary Sacrifice Could Help Offset Rising Employer NIC Costs

The last budget saw the announcement of Employers (Ers) National Insurance Contributions (NIC) changes which are likely to significantly increase the Ers NIC costs for most businesses from April.   Whilst businesses cannot avoid these changes, they may be able to mitigate the impact by looking at tax-efficient remuneration planning.  One tax planning area which could benefit many businesses is salary sacrifice and specifically, salary-sacrificing Employees (Ees) pension contributions if they are currently paid via a ‘Relief at Source’ (after tax) arrangement. This type of arrangement is where the employees’ pension contribution is paid to the pension scheme after tax and NIC have been deducted, the pension scheme receives a 20% (basic rate) contribution top-up in this scenario.   

If instead, a salary sacrifice pension arrangement was implemented and the employee pension contributions were paid into the pension scheme as gross employer contributions, the potential NIC and tax savings for employer and employee could be significant:

• Employers could save the Ers NIC cost on the Ees salary sacrificed pension contributions.  The Ers NIC rate is increasing to 15% from April, on a £50,000 salary paying a minimum 5% Ees pension contribution, this could amount to an Ers NIC saving of £375 per employee.  
• Employees could save the Ees NIC cost (currently 8% or 2%) on the sacrificed pension contributions. 
• Employees who repay child benefit at income levels between £60,000 and £80,000 may be able to save further still, as their income would be lower for the purpose of the child benefit clawback charge calculation.
• Employees with income between £100,000 and £125,140 gradually lose their tax-free personal allowance, meaning employment income in this band can be taxed at an effective rate of up to 60%.  Salary-sacrificing employee pension contributions will reduce an individual’s taxable income, so could potentially enable employees to retain more of their tax-free allowance and save additional income tax.
• If a higher rate taxpayer employee is not in Self-Assessment, they need to make a separate claim under the PAYE system for higher rate tax relief on their Relief at Source (after tax) employee pension contributions.  Many will be missing out on this relief as they don't know about it or don't have the time or inclination to make the claim.  With a salary sacrifice arrangement, the tax and NIC relief is received at source so would always be given, and at an earlier juncture than if having to claim tax relief separately.
• Many employees will make significant additional net personal pension contributions outside of their salary (the employer may not be aware of these), especially as many pension pots are inadequate.  It may be possible to build these additional contributions into the salary sacrifice arrangement, enabling even more NIC and tax savings for employers and employees. 

There can also be NIC and tax savings to be made for employer and employee if electric company cars are contracted via a salary sacrifice lease arrangement. 

The increase in Ers NIC costs is likely to hit businesses hard and many businesses will have to lower potential pay rises, freeze salaries, and may even need to make redundancies.  Salary sacrifice could help mitigate the effect of the Ers NIC increases.  As employees may be able to benefit from NIC and income tax savings, it could in some cases help with employee retention.  When a good employee leaves, there can be significant recruitment, retraining and client/customer relationship costs of having to replace that employee, so a salary sacrifice arrangement may help to reduce these additional business costs in a limited number of circumstances as well.

Salary sacrifice results in a change of employment terms so should be deemed permanent by the employer and employee, the correct documentation needs to be put in place to effect a valid salary sacrifice arrangement.  The salary sacrifice arrangement may affect an employee in other areas, such as their eligibility for mortgage funding or tax credit entitlement, for example.  Prior to entering into an arrangement, the employee should therefore be comfortable that salary sacrifice is right for them, so they may need to take their own advice in respect of this.

The upcoming increase in Employer National Insurance Contributions will put additional financial pressure on many businesses. Proactively exploring salary sacrifice arrangements could help unlock tax and NIC savings for both employers and employees - helping to mitigate these rising costs.

Contact us today at tax@teamjs.co.uk if you would like further advice in this area.