Combatting the National Insurance increase

In September 2021 the Government announced a 1.25% increase in National Insurance contributions (NICs) to take effect from 6th April 2022. This means the main NICs rate for the employed (also called Class 1 NICs) has now increased from 12% to 13.25% for gross taxable earnings between £9,880 and £50,270 per annum.

Salary Sacrifice

The most common way of making pension contributions linked to employment is to pay the contribution to the pension provider after tax and NICs have been deducted. However, it is possible, under a salary sacrifice agreement (also called a salary exchange agreement). For your employer to pay your pension contribution on your behalf and to reduce your salary by an equivalent amount.

Reduce Taxable earnings

This effectively reduces your gross taxable earnings, and therefore your tax and NICs, without affecting the amount you contribute to your pension. A salary sacrifice agreement can therefore be used to combat the recent increase in NICs. This is by reducing the amount of your salary that is subject to NICs.

Is it right for you?

Offering a salary sacrifice arrangement is not compulsory for employers. However it may be worth discussing whether they would consider using one. It is important to note that reducing NICs can impact on your eligibility to receive State benefits. This includes building entitlement to the new State pension. Having a lower quoted salary may also affect the benefits offered from insurance contracts and your affordability on a mortgage application. It is therefore important to obtain further advice before signing a salary sacrifice arrangement.

If you would like to discuss NICs, salary sacrifice, pension planning or financial planning more generally please feel free to contact us.

NB. On 23rd March 2022, as part of the Spring Statement, the Government announced an increase in the threshold for starting NICs which will come into force in July 2022. This will see the primary threshold for NICs increased from £9,880 to £12,570.

A pension is long term investment. The fund value may fluctuate and can go down. Your eventual income may depend on the size of the fund at retirement, future interest rates and future tax legislation. The above information is based on current taxation legislation and regulations. Any levels and bases of, and reliefs from, taxation are subject to change.