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 by Aegon, the life insurance and pensions company.

From April 2022, NICs will rise by 1.25% for employees, employers and the self-employed, to fund the Government’s new health and social care levy.

Afford Bond Director, Paul Edwards commented: “Salary sacrifice is an arrangement employers may make available to employees. The employee agrees to reduce their earnings by an amount equal to their pension contributions. And in exchange, the employer then agrees to pay the total pension contributions. So, any contributions paid will be treated as employer only.

“So essentially, 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 individual’s tax liability is reduced.

However, Aegon also stated: “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.

Most commentators believe that as the increase in 1.25% NICs from next April will reduce employees’ take-home pay, salary sacrifice will appear even more attractive to dampen the increased cost.

Note:
Salary sacrifice isn’t for everyone. It’s unavailable if it reduces earnings below the minimum wage. From 1 April 2021 this is £8.91 per hour for those who are over 25, known as the National Living Wage.

Talk to us for expert payroll and accounting advice for your business. Email Paul.Edwards@affordbond.com or complete the Contact Us form on our website.