Can salary exchange save your clients money?

23 February 2022
In April 2022, the Government will be increasing National Insurance contributions. We look at how salary exchange could help your workplace clients mitigate the full amount of the increase and reduce the amount their employees pay.

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 2022/23Tax 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

 

This website is intended for financial advisers only and shouldn't be relied upon by any other person. If you are not an adviser please visit royallondon.com.

The Royal London Mutual Insurance Society Limited is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. The firm is on the Financial Services Register, registration number 117672. It provides life assurance and pensions. Registered in England and Wales number 99064. Registered office: 55 Gracechurch Street, London, EC3V 0RL.