On 6th April 2022 the employer’s national insurance rate increased to 15.05% from 13.8%. Employer’s NI is an additional tax liability payable by employers on the gross wages of their employees.
For a company with 10 employees and an annual payroll bill of £300,000 this is an annual increase in costs to the employer of £3,750. In the recent Spring Statement the Chancellor increased the employer allowance by £1,000. This means an increase in costs of £2,750 which will directly hit the bottom line.
What can be done if you are impacted?
One idea which you could consider is salary sacrifice.
Let’s say 8 of the 10 employees in the above example are contributing into a company pension scheme (2 have opted out) and are contributing 5% of their salaries (gross before tax) with the employer contributing the remaining 3%.
If the employer was to introduce a salary sacrifice scheme and effectively agree to pay over the 5% gross contribution paid by the employee (in addition to their 3%) in exchange for the employee reducing their salary by 5% then the net impact would be as follows:
- Gross Salary to employee before = £30,000
- Pension contribution paid by the employer = £712.80
- Gross Salary to employee after = £28,812
- Pension contribution paid by the employer = £1,900.80
There is no difference to the overall package, which remains £30,712.80 however the employee and employer will both save national insurance.
- Saving to the employee = £157.41
- Saving to the employer = £178.79
For eight employees the company will save £1,430.
This will go some way to cover the automatic £2,750 increase in employer NI costs!
This is of course the big positive but what are the negatives?
There are a few:
- The cost of setting up the scheme. You will need to amend contracts of employment so this will need to be discussed with your HR provider and agreed by your employees.
- There will be an increased administrative cost for your payroll provider or increased time for your internal payroll manager as it will be essential to keep a record of what the true gross salary is and the pension payments necessary, particularly when it comes to pay review time. It is also essential that the payroll team checks that the change to the employee’s gross salary does not put the employee below the national minimum wage as this is not permissible.
- From a mortgage perspective the gross has gone down so it is possible that employees could potentially lose a small element of the amount they could have borrowed, although technically salary sacrifice amounts should not be taken into account as deductions in mortgage applications.
- There will potentially be an impact on certain benefits such as SMP (statutory maternity pay), State Pension or contribution-based state benefits. These might include Jobseeker’s Allowance and Employment and Support Allowance.
There are pitfalls in respect of successfully implementing the salary sacrifice scheme but provided you take care then this is easily achievable. No clearance is necessary from HMRC.
Please note however you cannot force an employee to enter into this type of arrangement and once in they can always revert back if they decide to.
Salary sacrifice scheme for electric cars
One other salary sacrifice offering you could use is to offer your employees the opportunity of buying a brand new ultra-low emission car through your company in exchange for the employee sacrificing part of their salary. As illustrated with pensions above there are significant national insurance savings by doing so. However, this does involve you as the employer entering into a lease arrangement for a new vehicle which could put you as the employer at risk if there are changes in the employee’s circumstances. We would strongly recommend that you deal with this through a specialist provider for salary sacrifice car schemes rather than deal with this yourself as the potential for problems is far higher than for a pension salary sacrifice.
Savings can be substantial, particularly if you have a lot of employees in a company pension scheme. We would recommend you talk to your accountant / HR provider in the first instance.
We are able to assist clients of Friend & Grant with support for the above. If you are a client and interested in the above please contact your relationship manager. For non clients why not review our website and look at the many ways we are helping our clients to save tax, tax time and create wealth. Then why not book a FREE discovery meeting?
The content in this blog is correct as at 23 May 2022. See terms and conditions.