How salary sacrifice can help mitigate against National Insurance rise
National Insurance is rising on 6 April but the good news is that salary sacrifice schemes are a good way to decrease taxable income, says David Prosser.
There is less than a week to go until national insurance contributions increase, but there is still time to take action to mitigate the tax rise. In last week’s spring statement, chancellor of the exchequer Rishi Sunak refused to backtrack on his plans for a 1.25% increase in national insurance. But salary sacrifice schemes, offered by many employers, are a great way to reduce the impact of the increase, which comes into effect from 6 April.
In a salary sacrifice scheme, you give up some of your salary in return for your employer giving you a benefit of the same value. The most obvious example is a contribution to your pension plan, but some employers also offer benefits ranging from childcare support to the cycle-to-work scheme. In many cases, these benefits are not taxable. As a result, by entering into a salary sacrifice scheme, you are reducing the amount of income on which you will be taxed.
MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Not all employers offer salary sacrifice and those that do may offer you the option of making pension contributions in the traditional way, rather than through this route. But where you have the option of joining a salary sacrifice arrangement, the national insurance increase boosts the case for doing so.
There could also be an income-tax benefit. Before the spring statement, the chancellor had announced that income-tax thresholds would be frozen until at least 2024. So as your salary rises each year, there is an increased chance of you moving into a new income-tax band and paying higher rates. Salary sacrifice schemes could mitigate this impact.
Do the sums before you commit
There are some reasons to tread carefully. Many employers offer staff free life insurance, but this is usually calculated as a multiple of your salary; by reducing that salary in a sacrifice scheme, you are therefore reducing the amount of life insurance you’re getting through work.
Another potential issue is reduced mortgage affordability. Lenders making calculations about how much they are prepared to lend you will typically take account of your salary, so by sacrificing some of it, you may be limiting the amount you can borrow. Also, you may need to check what salary sacrifice might mean for benefits such as statutory maternity pay, which is also calculated with reference to your salary.
Still, it is worth doing the sums. If your employer offers a salary sacrifice scheme, it will be able to give you a detailed breakdown of what joining will mean for your take-home pay and your tax bill. You can then make an informed decision about joining.
The good news is that employers have an incentive to offer these schemes. Their tax bills are rising too, since employers’ national insurance contributions are also increasing on 6 April, so they’re looking for ways to save money. Some may even choose to share their national insurance savings with staff who join such schemes.
-
Energy, healthcare and utilities: how to tap into AI in the real economyAI promises to add to the productivity and profitability of much of the economy beyond tech. Here’s two themes to tap into AI in the real economy.
-
How Junior ISAs could help with inheritance tax planningLooming inheritance tax changes will limit how much pension wealth can be passed on but more people may be maxing out their loved ones’ JISA allowance instead
-
Why it might be time to switch your pension strategyYour pension strategy may need tweaking – with many pension experts now arguing that 75 should be the pivotal age in your retirement planning.
-
Rachel Reeves is rediscovering the Laffer curveOpinion If you keep raising taxes, at some point, you start to bring in less revenue. Rachel Reeves has shown the way, says Matthew Lynn
-
ISA reforms will destroy the last relic of the Thatcher eraOpinion With the ISA under attack, the Labour government has now started to destroy the last relic of the Thatcher era, returning the economy to the dysfunctional 1970s
-
Investing in forestry: a tax-efficient way to grow your wealthRecord sums are pouring into forestry funds. It makes sense to join the rush, says David Prosser
-
'Expect more policy U-turns from Keir Starmer'Opinion Keir Starmer’s government quickly changes its mind as soon as it runs into any opposition. It isn't hard to work out where the next U-turns will come from
-
Why pension transfers are so trickyInvestors could lose out when they do a pension transfer, as the process is fraught with risk and requires advice, says David Prosser
-
Modern Monetary Theory and the return of magical thinkingThe Modern Monetary Theory is back in fashion again. How worried should we be?
-
The coming collapse in the jobs marketOpinion Once the Employment Bill becomes law, expect a full-scale collapse in hiring, says Matthew Lynn
