FOR ADVISERS ONLY
Can salary exchange save your clients money?
From 6 April 2022, the Government will be introducing a temporary increase to National Insurance contributions (NIC). This 1.25% increase means:
- Class 1A and 1B employers will pay 15.05%
- Class 1 employees earning below NIC upper earnings limit will pay 13.25%
- Class 1 employees earning above the NIC upper earnings limit will pay 3.25%.
From 6 April 2023 this increase will be replaced by a new tax named the Health and Social Care Levy which will apply to both employers and employees, including those above the state pension age, at a rate of 1.25% each. The levy will have the same thresholds and requirements as the qualifying NIC and will appear as a separate line on their employees’ payslip.
How can my client’s save money?
By adopting a salary exchange arrangement, employers and employees will pay their pension contributions before NIC and Income Tax. This means that they will pay a reduced NIC which includes the upcoming increase.
How can salary exchange help my clients mitigate the increase?
Employer case study
The amount they can save will depend on the size of their workplace pension scheme, and the value of salary exchanged.
The examples below highlight how much the increase will be for employers and how introducing salary exchange can help them save.
| Number of employees | 50 | 100 | 500 |
|---|---|---|---|
| Total yearly salary payment | £1,500,000 | £3,000,000 | £15,000,000 |
| Total employer NIC contributions 2021/22 |
£146,004 | £292,008 | £1,460,040 |
| Total employer NIC contributions 2022/23 |
£157,272 | £314,545 | £1,572,725 |
| Total increase to employer NIC contributions |
£11,268 | £22,537 | £112,685 |
| Total salary exchanged by employees (5%) |
£75,000 | £150,000 | £750,000 |
| Employer NIC rate (2022/23) | x 15.05% | ||
| Employers annual NIC saving* |
£11,287 | £22,575 | £112,875 |
*Figures are based on an average salary of £30,000 per employee, each exchanging 5% of their salary for a pension contribution. Employer yearly savings are the NIC that would be paid if salary exchange wasn’t in place.
Employees case study
Let’s see how this works for your client’s employees. We’ve based this example on an employee who lives in England, earning £30,000 a year, has a personal allowance of £12,570 and is paying a 5% pension contribution. Their employer is not reinvesting the NIC savings into the workplace pension scheme.
| Monthly employee salary | |||
|---|---|---|---|
| Tax year 2021/22 | Tax year 2022/23 | Tax year 2022/23(using salary exchange) | |
| Gross pay | £2,500 | £2,500 | £2,375 |
| Income tax | £290.50 | £290.50 | £265.50 |
| National Insurance | £204.32 | £222.20 | £205.64 |
| National Insurance increase | N/A | £17.88 | £1.32 |
| Pension contribution | £100 | £100 | £0 |
| Take home pay | £1,905.18 | £1,887.30 | £1,903.86 |
By contributing to their pension through salary exchange, they can mitigate most of the increase and reduce the cost to them to £1.32 a month. (£1905.18 - £1903.86). Remember any tax savings will depend on individual circumstances and could change in the future.
More information
To find out more about salary exchange speak to your usual Royal London contact or visit adviser.royallondon.com/salary-exchange