Salary sacrifice arrangements could help lessen employees’ additional tax bills from the rise in National Insurance contributions (NICs) from April 2022, according to a report.
from April 2022, NICs will rise by 1.25% for employees, employers and the self-employed, to fund the governments new health and social care levy.
Aegon, the life insurance and pensions company, said employers might be able to reduce their employees’ liability to the NICs rise by taking a salary sacrifice.
Salary sacrifice is an agreement between an employer and employee to reduce an employee’s cash pay in return for a non-cash benefit.
If this arrangement is used to pay into a pension scheme, the sacrificed portion of the salary technically becomes an employer pension contribution.
As these are not liable to income tax or NICs, the individuals tax liability is reduced.
it's unlikely employees will be able to use this to reduce their payments to the 1.25% health and social care levy, however, which will replace the NICs hike from April 2023.
Katie Smith, head of pensions at Aegon, called salary sacrifice a “powerful and tax efficient way of paying pension contributions”.
“Salary sacrifice arrangements are a powerful and tax efficient way of paying pension contributions, as neither the employee nor the employer pay National Insurance contributions on the amount of salary exchanged. And the employee won't pay income tax on the amount exchanged either. Salary sacrifice arrangements designed to pay pension contributions have become increasingly popular in recent years as many employers use these to help cover the costs of pension contributions.”
“The increase in 1.25% NICs from next April increases employers’ payroll costs and will reduce employees’ take home pay, making salary sacrifice even more attractive to dampen the increased cost,” she added.
Salary sacrifice isn't suitable for everyone as it could lead to a reduction in some state benefits and could impact mortgage applications. It may also impact other employee benefits such as life cover , although many employers will use a higher “reference” salary for these purposes.
Salary sacrifice can't be used to reduce someone’s earnings below the national minimum wage rates.