How to Save on National Insurance with Salary Sacrifice & Pension Contributions
Updated: May 16
With this year’s hike in National Insurance contributions, employees and employers alike may be facing a far bigger NI liability than anticipated.
This increase aims to alleviate pressure on the NHS and the social care system across the U.K., but may result in financial squeezes, especially as the price of living rockets. Luckily, all is not lost. There are a couple of ways that employers can save on national insurance, and in this article we’ll tell you everything you need to know to minimize your employer NIC this year.
2022 National Insurance hike: Quick summary
Before we look at how to save on employer national insurance, here’s a quick recap of how national insurance rates have changed in 2022.
From April of this year, NI contributions rose by 1.25% for one year. This means that employers will need to pay 15.05% on any employee earnings above the secondary threshold (£175 per week and £758 per month).
Employees will pay 13.25% on earnings between the primary and upper secondary threshold (from £190 to £967 per week or from £823 to £4,189 per month) and 3.25% on any earnings above that.
From April 2023, this national insurance hike will be replaced by a so-called Social Care & Health Levy and national insurance contributions will return to their previous rate.
Salary Sacrifice & Pension Contributions
In this section, we’ll take a brief look at everything you need to know about workplace pensions and how salary sacrifice works.
Everything you need to know about workplace pensions
The amount that employers and their employees pay into their pension depends on the workplace pension scheme and whether they were automatically enrolled or ‘opted in’.
Since April 2019, the minimum employer pension contribution is 3% and the employee pension contribution is 5%. However, it depends on the workplace scheme that the employer has chosen.
If an employee has voluntarily enrolled in a workplace pension and they earn more than £520 a month, £120 a week or £480 over 4 weeks, then their employer is required to contribute the minimum amount.
Relief at source
Relief at source is a method of claiming tax relief on pension contributions. Individuals pay into their pension scheme and then their provider claims basic rate tax relief from HMRC and puts the amount reclaimed into that person’s fund. This applies to individuals who do and don’t pay tax.
What is salary sacrifice?
Salary sacrifice, also known as ‘salary exchange’ or ‘smart pay’, is an effective way of saving on your national insurance contributions. It is an agreement to ‘reduce an employee’s entitlement to cash pay, usually in return for a non-cash benefit’.
Under a salary sacrifice agreement, employers pay their employees’ pension contributions directly. Pension contributions are deducted before tax and national insurance. The result is that employees’ net pay is the total amount less their pension contribution.
Advantages of Salary Sacrifice
By paying into employees’ pensions directly, employers reduce the net pay that employees receive. The result is that employees make savings on their national insurance, as well as seeing an increase in their take-home pay.
In addition, employees whose pension contributions usually benefit from the ‘Relief at Source’ scheme will see their tax relief much faster rather than having to wait for HMRC to process it at a later date.
From an employer’s perspective, salary sacrifice is equally beneficial because they also pay smaller national insurance contributions on their employees’ income. Employers are also able to reinvest their savings back into their business or top up their employees’ pensions.
How does Salary Sacrifice work?
To implement a salary sacrifice scheme in your workplace, you need to make and agree on relevant changes to your contracts of employment with your employees in which they confirm they are willing to ‘sacrifice’ a set portion of their salary. This can also be applied to one-time items such as bonuses.
Salary sacrifice makes no difference to the amount that is paid into the employee’s pension. It only changes at which point and how it is deducted from their salary.
Things to consider about Salary Sacrifice
Employers must always ensure that salary sacrifice arrangements do not reduce an employee’s earnings below National Minimum Wage.
Employees may find that they lose entitlement to earnings-related benefits like Maternity Allowance or Additional State Pension
Salary sacrifice can also impact the amount of statutory pay that an employee is eligible for
A reduced take-home pay may impact an employee’s ability to borrow money (such as trying to take out a mortgage)
For some employees earning above a certain threshold, salary sacrifice can be counterintuitive.
If HMRC deems a salary sacrifice agreement invalid, it will consider the amount ‘sacrificed’ as earnings and therefore taxable (and also subject to national insurance levies).
How much could salary sacrifice save me?
You could save 13.25% of the National Insurance Contributions you would have paid on earnings above £9,880 (tax year rate 22/23), and 3.25% on earnings above £50,270.
According to Workplace Pensions Direct, by implementing a salary sacrifice scheme, an organisation in the U.K. that has around 200 employees who earn an average of £30,420 could make savings on their NIC of up to £40,000. The following table shows how much you and your employees could save by implementing a salary sacrifice scheme. Note that once you hit the pension qualifying earnings threshold, the pension contribution stays constant, and therefore so do the potential savings.
Employer NI Annual Savings
Employee NI annual savings
How to Implement a Salary Sacrifice Arrangement
Establishing a salary sacrifice scheme, though an effective way of saving on you and your employees’ NI liability, can be labour-intensive to begin with.
It’s essential to ensure that your agreements are valid and legally compliant. That’s why many businesses turn to expert advisors such as Mintago who specialise in reducing NI costs.
Here are the steps that you’ll need take to roll out your salary sacrifice scheme:
1. You must ensure to meet all HMRC’s prerequisites for a valid salary sacrifice agreement:
You must make the relevant changes to your employment contract and agree on these changes with your employee.
The amendments must explicitly outline the amount of pay to be sacrificed and the benefit the employee will receive in return
The salary sacrifice can only apply to future earnings (cannot be applied retrospectively).
2. You’ll need to consider whether you’ll be making blanket changes to your employment contracts or operating an ‘opt-in, opt-out’ system. Compliance issues and implementation of the salary sacrifice scheme may differ depending on the chosen format.
3. You’ll need to decide how you’ll use your NI savings, whether for reinvesting in your business or generously adding to your employees’ pension pots.
4. You may want to make time for a ‘consultation’, allowing time to communicate with your employees, explain why a salary sacrifice is beneficial and outline the proposed changes.
5. If operating an ‘opt-in, opt-out’ scheme, you’ll need to provide two separate pension schemes or have the capability to segment your workforce to accommodate those enrolled in the sacrifice scheme and those who are not.
Other ways to save on National Insurance
There’s one more way to save on National Insurance: with an employment allowance.
If your total NI contribution is under £100,000 per year, your business may be eligible for an employment allowance that reduces your class 1 NI contributions by up to a maximum of £5,000.
Modern payroll software such as Zelt makes it easy to apply for employment allowance. All you need to do is submit an Employment Payment Summary (EPS) to HMRC directly through your platform.
Zelt & Salary Sacrifice
With the 22/23 National Insurance hike increasing NICs by 1.25%, it’s no surprise employers are looking for ways to reduce how much they and their employees owe. Salary sacrifice is a legitimate and legal way to simultaneously reduce National Insurance liability, increase employee take-home pay, and make substantial savings for the business.
Your modern enterprise software should make the roll-out of salary sacrifice schemes easy. But salary sacrifice isn’t solely a payroll matter, it crosses over into HR and pensions too.
For this reason, you should be looking for a unified workspace software, like Zelt, that empowers employees to opt in or out, access transparent information about your salary sacrifice schemes, and ultimately make their own decisions – which, in turn, improves the employee experience.
Finally, your workspace software should be agile and able to accommodate your particular needs. When it comes to salary sacrifice, the ability to roll out different payment and ‘sacrifice’ schemes for different employees is essential. And if your software isn’t up to the task, you may find yourself with a substantial administrative load.
FAQs about saving on national insurance
Can I save on NI with pension contributions?
As we’ve seen, for most employees, opting in to a salary sacrifice arrangement will result in reduced national insurance contributions.
Is salary sacrifice worth it?
Salary sacrifice arrangements result in higher take-home pay for employees and reduced NI contributions for employers. From this perspective, it’s definitely worth it.
Is there a limit on salary sacrifice in the U.K.?
Though there’s technically no limit on how much an employee can choose to sacrifice, their income can never dip below the national living wage. In addition, there is a cap on how much you can contribute to your pension tax free per year, so it only makes sense to ‘sacrifice’ up to £40,000 (the current limit) every year anyway.