On 6 April 2022, the Government introduced a temporary increase to National Insurance contributions.
This 1.25% increase means:
You can find out more information on the National Insurance classes at National Insurance: National Insurance classes - GOV.UK (www.gov.uk)
From 6 April 2023 this increase is being 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 National Insurance contributions.
Let’s take a look at an employer with an average wage bill of £3,000,000 a year. We’ve based our example on 100 employees with an average salary of £30,000.
Tax year | Total employer National Insurance contributions bill |
---|---|
2021/22 | £292,008 |
2022/23 | £314,545 |
Increase: £22,537 |
Their current scheme is set up using relief at source and their employees are paying £150,000 (£3,000,000 x 5%) in pension contributions. This is based on employees paying a 5% contribution.
By setting up their pension using salary exchange, the employer could save £22,575 (£150,000 x 15.05%) a year on their National Insurance contributions. This means the employer can mitigate the full amount of the increase through adopting salary exchange.
Let’s see how this works for an employee. We’ve based this example on an employee who lives in England, who earns £30,000 a year, has a personal allowance of £12,570 and is paying a 5% pension contribution. The employer is not reinvesting the National Insurance savings into the workplace pension scheme.
Monthly 2021/2022 | ||||
---|---|---|---|---|
Gross pay | Income tax | National Insurance | Pension | Take home pay |
£2,500 | £290.50 | £204.32 | £100 | £1,905.18 |
Monthly 2022/2023 | ||||
---|---|---|---|---|
Gross pay | Income tax | National Insurance | Pension | Take home pay |
£2,500 | £290.50 | £222.16 | £100 | £1,887.34 |
Increase £17.84 |
Using salary exchange
Monthly 2022/23 | ||||
---|---|---|---|---|
Gross pay | Income tax | National Insurance | Pension | Take home pay |
£2,375 | £265.50 | £205.60 | £0 | £1,903.90 |
Before salary exchange the employee was paying a pension contribution of £100 a month through relief at source. When this is paid into the pension plan it is grossed up to £125. Using salary exchange the employee sacrifices £125 a month reducing their salary from £2,500 to £2,375 a month.
By contributing to their pension through salary exchange, this employee can mitigate most of the increase and reduce the cost to them to £1.28 a month (£1905.18 - £1903.90).
Salary Exchange - frequently asked questions - Royal London for advisers
How to get 61.5% tax relief on pension contributions - Royal London for advisers
60% tax relief on pension contributions - Royal London for advisers
National Insurance rates and earnings limits from 6 April 2016 - Royal London for advisers
The information provided is based on our current understanding of the relevant legislation and regulations and may be subject to alteration as a result of changes in legislation or practice. Also it may not reflect the options available under a specific product which may not be as wide as legislations and regulations allow.
All references to taxation are based on our understanding of current taxation law and practice and may be affected by future changes in legislation and the individual circumstances of the investor.