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.

This is particularly valuable as national insurance contributions go up. For someone earning £50,000 a year, the 1.25% national insurance increase will add around £200 to their annual bill for the 2022-2023 tax year. However, by using salary sacrifice to increase their pension contributions by £100 a month, they could wipe out around £160 of that increase, without reducing the total value of their benefits at all.

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.

Recommended

Sterling crashes to its lowest since 1985 after mini-Budget
Currencies

Sterling crashes to its lowest since 1985 after mini-Budget

The pound has fallen hard and is heading towards parity with the US dollar. Saloni Sardana explains why, and what it means for the UK, for markets and…
23 Sep 2022
Earn 3.7% from the best savings accounts
Savings

Earn 3.7% from the best savings accounts

With inflation topping 10%, your savings won't keep pace with the rising cost of living. But you can at least slow the rate at which your money is los…
23 Sep 2022
Three top-notch Asian stocks to buy
Share tips

Three top-notch Asian stocks to buy

Professional investors Adrian Lim and Pruksa Iamthongthong, managers of the Asia Dragon Trust, pick three of their favourite Asian stocks to buy now.
23 Sep 2022
How to use Section 75 credit card protection for your purchases
Credit cards

How to use Section 75 credit card protection for your purchases

Your credit card can give you extra protection when the goods or services you purchase fall short of your expectations. Ruth Jackson-Kirby explains ho…
23 Sep 2022

Most Popular

Why we should abolish stamp duty – the worst tax in Britain
Tax

Why we should abolish stamp duty – the worst tax in Britain

Stamp duty is Britain’s most horrible tax. We should forget cutting it and abolish it altogether, says Merryn Somerset Webb.
22 Sep 2022
Mini-Budget: stamp duty and income tax cut as Kwarteng targets growth
Tax

Mini-Budget: stamp duty and income tax cut as Kwarteng targets growth

Chancellor Kwasi Kwarteng announced sweeping tax cuts in his mini-Budget statement. Here's what was said.
23 Sep 2022
Could gold be the basis for a new global currency?
Gold

Could gold be the basis for a new global currency?

Gold has always been the most reliable form of money. Now collaboration between China and Russia could lead to a new gold-backed means of exchange – g…
22 Sep 2022