Salary Sacrifice & National Insurance: Smarter Ways to Cut Costs

All employers, whether they operate in the private space, the not-for-profit space, charities, any type of organisation that has employees also has an additional financial obligation in terms of National Insurance. Now from April 25, the National Insurance rules changed in terms of the amount that an employer is due to pay.

The limit, the allowances, all that went in, and there's a topic that really should be dealt with, and that is the idea of salary sacrifice. Now, salary sacrifice is a very powerful talk when used correctly that mitigates the impact of National Insurance Contributions for the employer, and also has an effect in terms of the pension contributions that are paid as well.

I'm going to be focusing on the National Insurance impact and salary sacrifice. And I'm going to be covering what salary sacrifice actually is, how it's beneficial for both employee and employer. We'll throw in a few numbers as well, and at the end I'm going to make comment on a webinar I did on this earlier, a free webinar I should hasten to add, which talks about salary sacrifice and Employer’s Natural Insurance.

Let's crack on.

dropped from 9,100 pounds to 5,000. And thirdly, by the way, by way of mitigation, there is an additional Employer's National Insurance that went from 5,000 to 10,500. What's going to happen is a lot of employers will be financially impacted, the money they have to pay their bottom line, their bank balances will be reduced as a consequence of that.

in general, a lot of employers will be paying more in National Insurance Contributions or NICs for short, for pretty much every employee on your payroll. Now, to reiterate that, the headline rate of 13.8% goes to a flat 15%. Class 1A National Insurance Contributions - that kicks in when you provide taxable benefits to your staff, like company cars, private medical insurance. That rate also goes up to 15% if you have something called Class 1B,

let's get technical here, so if you've got PAYE supplement agreements, then there are going to be uplifts in tax. And for me, National Insurance is a tax. It may not be called a tax, but it behaves like a tax, it looks like a tax, and it is a tax. Now, the clear result of this is that employing staff of which there's a good commercial reason for it, is going to be more expensive for your business.

It's going to be a direct impact on your support costs, your overheads. But I feel that every challenge is also an opportunity to re-look at what you're doing and be a little bit smarter. So let's expand and look into what salary sacrifice actually is. Now, salary sacrifice sounds very formal. It's nothing to do with Aztec gods or anything, but it's an effective and tax efficient arrangement between you, the employer, and your employee.

Now, the simple idea is that your employee agrees and there's got to be an agreement - you can't impose this on them - agrees to give up part of their gross salary in exchange a quid pro quo if you want, for a reduction in their salary. But what they get in return is they get a non-cash benefit of a similar value.

So instead of the employee having to fund that item themselves at their own personal pocket, you as the employer step in, you offer to provide that to them. And if structured correctly, everybody's a winner. Now the typical benefits are things like pension contributions, probably one of the more common elements of a salary sacrifice scheme.

So you as the employer, agree to provide more by way of pension contributions, put more into the kitty for them, things like cycle to work schemes. There are certain other qualifying tax free benefits, which I'm going to pick up later on as well.

Now, let's look at it this way. If you are the employee and you are funding something personally, like putting more money into your pension scheme, perhaps pay for your own medical insurance, et cetera, think about how much you have to earn in gross terms in order to have that money in your pocket to actually go out and spend that money.

If your employer steps in, first of all, that means you can preserve more of your personal funds. You don't have to earn as much salary to fund that, and that means if you've got a lower salary, the employer also benefits by having lower Employer’s National Insurance as well. Now the consequence is that when you enter into a salary sacrifice scheme, both the employee benefits in terms of paying less National Insurance, the employer pays less National Insurance on top, and it can be a win-win for all parties.

Now it is legal if you go through the right protocol or the right procedure. And if you go through it correctly, it can significantly cut down on business costs. And with a hike on National Insurance costs that kicked in in April 25, it's certainly one to visit. Now, how does it actually work in practice?

Let's break it down a little bit more. Now I’m going to use the example of pension contributions. Now, pension contributions is an example. There are other things that you could use instead of pension contributions. Now imagine you have a member of staff, an employee who wants to put 500 pounds a month into their pension pot.

Now, if we, using 24, 25 rates by way of illustration, imagine the situation if salary sacrifice wasn't in there. Now the employee earns their salary. They're then out of that salary, contribute 500 pounds from their take home pay into their pension pot. Yes, they will get tax relief. The full salary has been subject to National Insurance, though for both you as the employer and them as the employee.

Now, if the Employee's National Insurance, for argument's sake is around about 40 pounds a month as a working number, you as the employer, will be paying a roundabout just under 70 pounds on that salary using the old 13.8% rates. Now let's fast forward to see what that situation would be in 25, 26. Now, first of all, if no changes happen, there's a colic and an increase in the Employee's National Insurance by roundabout six pound per month.

It doesn't sound a great deal, but remember, that's per employee and that's effectively 72 pound per year for each individual employee. The more employees you have, then obviously the bigger the cost. Now, let's assume we entered into a salary sacrifice scheme and the employee agrees. And remember, it's got to be an agreement.

You can't impose that on them. There's got to be a discussion. There's got to be an agreement, and it is worthwhile documenting as well. The employee agrees to reduce their pay, their gross pay by 500. What you say instead is that if they're going to take a drop in salary, you'll put money into their pension scheme to compensate.

Now what will happen is the employee will pay less National Insurance. That's the Employee's National Insurance, lower salary, lower National Insurance. And this could range for anything between 10 and 40 pound a month. Critically for you as the employer, you are going to save that hike. You're going to save National Insurance for 25 26, because you will be paying the Employer's National Insurance on a lower salary.

And what's the best part? Well, the pension contributions are exactly the same. In fact, they may slightly increase. And remember something like pension is a tax free benefit. There's no additional tax for the employee. There's no additional obligation on the employer, and everybody wins. Now, over a course of a year, there's a saving of 900 pounds per employee.

Multiply that by the number of employees that you have on the books, and it could be quite a significant impact. It's practical and it's effective. Now, pensions are a non-taxable benefit in kind and what other benefits could also qualify for salary sacrifice? Now, the new rules, by the way, did reduce the number of eligible benefit of tax and NIC under salary sacrifice, but there are still some good ones to be had.

So pension contributions, lower emission vehicles, workplace nurseries, employer providing bikes and cycle safety gear. Now there is some legalities here that we have to take notice of. You can't just do that. There's got to be some protocol, procedures and paperwork to back this up. We don't want our friends at HMRC knocking on the door saying what's going on here?

Now to correctly deliver the savings, a salary sacrifice arrangement must follow the rules that HMRC layout precisely. Here's the typical legal requirements. You've got to update the employee's contract of employment. It's going to be formally documented and it's going to be agreed in writing. There's going to be a real reduction of pay.

You can't just say the salary's lower for tax purposes. You've got to generally structure it that way and pay it that way and make sure that's reflected in the payroll records. There's no right to automatic reversion, so your employees can't just simply revert to their original salary at will. There needs to be a structured process for changes, maybe typically like the annual review

or a certain event in somebody's employment life. And the arrangement must be set up in advance of running the payroll. You can't back date a salary sacrifice scheme. You've got a plan ahead to get the benefits from the start as soon as. Now, mistakes in this setup could lead to HMRC, challenging it, HMRC are not foolish.

They are aware that salary sacrifice will have a big take up, certainly increasing here, and you've got to make sure that you've got all bases covered. The last thing you want is to enter into a scheme, not correctly structure it and end up paying more in penalties and you have false savings. As I said, it's not just the employer who goes to a salary sacrifice.

Employees also benefit. That's good for staff retention, good for wellbeing and lower National Insurance Contributions means more take home pay. Obviously, something like increased pension contributions means that take home pay results in them having a bigger pension part and the idea of retirement becomes closer to them. Now, structured correctly, it is a win-win

Situation. Now, what should you add sooner rather than later? Well, again, the increase in National Insurance is in place. It can accumulate quite significantly. If you think about the additional cost here, think about the additional sales we've got to generate in order to cover that cost. And that's just to stay in the same situation.

Now, what should we be doing next? Well, we are here to support businesses to prepare, plan and profit. We love that idea of plan it to your profit. If you feel you want to talk to us about this or talk to your accountant, get the conversation going and talk about salary sacrifice. We've covered this topic in greater detail in our free recorded webinar.

Check the show notes for a link. Now folks, thanks for tuning in. I hope you got some value from this podcast. If you have, I'd love it if you could share it, subscribe, give me some comments. What do you think? Is that something you're going to be implementing? Until next time, plan it, do it and profit.