Using salary sacrifice to save NI contributions
We've previously suggested some ways you can mitigate the effect of the increase in NI contributions. In this post we're going to focus on ways of using salary sacrifice to save NI contributions.
Overview
Many employees and employers use salary sacrifice schemes as a method of accessing valuable workplace benefits. A salary sacrifice scheme can also reduce your tax and National Insurance (NI) costs.
What Is a salary sacrifice scheme?
A salary sacrifice scheme is a formal agreement between an employer and an employee. Your employee gives up part of their salary in return for a non-cash benefit. For example, a pension contribution or extra holiday.
Optional Remuneration Arrangements
Optional Remuneration Arrangements ('OPRAs') include more than just traditional salary sacrifice. Typically an OPRA also covers benefits with a cash allowance option and flexible benefit schemes offering cash alternatives.
From April 2017, the tax and NI savings were removed for many Benefits in Kind (BIKs). These changes introduced by HMRC affect most salary sacrifice and OPRA schemes.
However, fortunately some benefits are not affected by these changes and remain tax-efficient and still allow NI savings These are listed below:
In the example below we set out how using salary sacrifice to save NI contributions can result in significant savings.
Example
Decker Ltd has a company of 50 employees who, earn £27,500 per annum each. It doesn't use a salary sacrifice scheme and the current bill is as follows:
It's gross annual salary Payments amount to £1,375,000 and Employer NI Contributions (at the new rate of 15%) will be £206,250 It also makes Employer Pension Contributions totalling– £41,250.
So the total cost to Decker Ltd would be – £1,622,500
However, all 50 employees decide that they want to go through a salary sacrifice scheme and sacrifice £1,250 a year into their pension. So the position is now as follows;
Gross annual salary Payments – £1,312,500 (minus the £62,500 that is being sacrificed and Employer NI Contributions of £196,875. Decker Ltd's employer Pension Contributions will be £101,875
So the revised cost to Decker Ltd after salary sacrifice would be £1,611,250 a saving of £11,250!
Other benefits of salary sacrifice schemes
Salary sacrifice schemes can offer more than just financial savings. They can genuinely improve your employee’s quality of life. These schemes make non-cash benefits easier to access. As a result, items that once felt like luxuries become affordable.
For those planning ahead, it’s a smart way to increase your pension contributions. This could boost your pension pot significantly. What's more, the scheme can encourage greener choices. Employees can save on electric vehicles or use the cycle-to-work scheme
Additionally, families can gain real advantages too. The potential savings on childcare make high-quality care more accessible.
What are the disadvantages?
It's vital that your employees understand the possible negatives before they commit to a salary sacrifice scheme.
For example a lower salary could reduce some state benefits. These include maternity pay, paternity pay and statutory sick pay.
Additionally, your employee's creditworthiness might be affected. Frequently lenders often assess salary when making offerings on mortgages, credit cards or personal loans.
Summary
Using salary sacrifice to save NI contributions can also offer numerous benefits. However you need to be aware of certain limitations and requirements when implementing them.
A primary consideration is that your employee’s pay cannot be reduced below the National Minimum Wage – this is a legal obligation that cannot be avoided. Furthermore, you must also ensure you continue to meet all statutory pay entitlements. these form part of the legal obligations to your employees.
You'll also need to consider your company’s responsibilities under auto-enrolment legislation either. Therefore minimum pension contributions must still be maintained based on the pre-sacrifice salary to ensure compliance.
To stay on top of these obligations, regular compliance reviews are essential. They will also provide an opportunity to assess your scheme’s effectiveness and make any necessary adjustments. This will ensure both you and your employees get the most from a salary sacrifice scheme.
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