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FOR EMPLOYERS: Increases to National Insurance rates

There is a way however to help offset these increases – utilising salary sacrifice.

Rob Marshall

September 13, 2021

How you can offset the new 2022 increases using salary sacrifice

The government announced this week an increase to both employer and employee contribution rates to fund additional NHS and Social Care initiatives. From 6 April 2022, the Class 1A rate for employers will rise to 15.05% and rates for employees will rise to 13.25% main rate/3.25% higher rate. As well as employee earnings, these increases also impact dividend payments.

Obviously, these increases will put additional financial pressure on you and your employees.  However, there is a way however to help offset these increases – utilising salary sacrifice.

How does it work

Salary sacrifice falls under employment law, not tax law, and is treated as a variation of an employee’s contract.  It is recognised by HMRC as a valid method to fund employee pension contributions and selected workplace benefits.

For pensions, the arrangement works by the employee agreeing to reduce pay by an amount equal to the pension contribution they would normally make, and in exchange, the employer makes an additional pension contribution of equal value, increasing employee take home pay and saving employers the NIC element of the salary amount sacrificed. For cycles to work, your business funds a bicycle/cycling equipment, and the cost is reclaimed over a set period.  

In both of the examples above, both you as the employer and the employee do not pay NIC on the amount of salary sacrificed. There are other benefits – such as salary sacrifice ULEV’s and tech devices, that save only employees NIC at their marginal rate – so they still offer cost savings to your people.

So what are the potential savings?

For an individual earning £25,000, contributing 5% of their pay into the pension scheme, the employer NIC saving would amount to £179 per year. For a workforce of 25 employees, your annual employer saving could be at least £4,300.  For further information about the changes coming in April 2022 click here.

All sounds great – but how do you implement salary sacrifice and utilise the NIC savings?

Recommended approach

  • Plan your project. Establish the key stakeholders inside your business and externally. Timing is key to any project - an agreed timeframe to work to that fits in around other projects or pay reviews is advisable.
  • Decide how to use your savings. Agree how the NIC savings will be utilised with senior decision makers in your business – this is key to establishing your benefits budget.
  • Review your pension scheme. Your current pension scheme may not be suitable, or may need to be revised to move to a salary sacrifice arrangement.
  • Review your payroll. Review your payroll to ensure that only those eligible are included in the exercise, such as those on or close to the NMW/NLW/SMP. Ensure your payroll software or payroll provider can facilitate salary sacrifice.
  • Communicate. Having a plan to consult and communicate the changes to employees.  Ensure they understand the rationale behind the project, how it affects them and have support in place to answer any questions.
  • HMRC approval. Gaining HMRC approval for your salary sacrifice arrangement will give reassurance that you have completed your project to the correct standard.
  • Use professional advisers. Have professional advisers in place to guide and support you, and agree any professional fees at the start of the project.
  • Be creative. Whether it’s a new benefits system to manage and communicate to your employees better, or new benefits to enhance or compliment your current offering, taking a creative approach will give you maximum impact and increase engagement, as well as improve your chances of recruiting and retaining the best people.

About us

At WorkLife by OpenMoney, we can implement, launch, and manage a number of salary sacrifice benefits – such as tech devices and cycles to work, and more benefits are on the way. Our benefits platform can also display the salary sacrifice calculations and how they benefit your employees via the live total reward statement and benefits hub.

If you’d like to find out more, please contact the WorkLife team at enquiries@worklifebenefits.uk