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Using Salary Sacrifice to save on National Insurance costs

Published  28 April 2023
   5 min read

Would you like your clients to save money on the running of their business or save money themselves as an employee by paying less National Insurance? This case study shows how they could pay less National Insurance.

What National Insurance costs do employers pay?

Since 6 November 2022, Class 1A and 1B employers have paid 13.8% National Insurance contributions on earnings over £9,100.

 

What National Insurance costs do employees pay?

Since 6 November 2022, class 1 employees pay:

Earnings Rate of National Insurance payable
Below £12,570 0%
£12,570 - £50,270 12%
Above £50,270 2%

You can find out more information on the NI classes at National Insurance: National Insurance classes - GOV.UK (www.gov.uk)

 

How can salary exchange save on National Insurance costs?

 

Employer case study

Let’s take a look at an employer with an average pay bill of £3,000,000 a year. We’ve based our example on 100 employees with an average salary of £30,000 assuming the National Insurance figures above apply for a whole tax year.

Their current pension scheme is set up using relief at source and their employees are paying £150,000 (£3,000,000 x 5%) in pension contributions and employees are paying a 5% contribution.

By setting up their pension using salary exchange, the employer could save £20,700 (£150,000 x 13.8%) a year on their National Insurance contributions.

The employer can keep this saving for themselves or can pass some or all of it on to their employees.

 

Employee case study

Let’s see how this works for an employee. We’ve based this example on an employee who lives in England, earns £30,000 a year, has a personal allowance of £12,570 and is paying a 5% pension contribution.

Take home pay stays the same

  Gross pay Income tax National Insurance Employee contribution Additional employer contribution1 Take home pay
Before salary exchange £2,500.00 £290.50 £174.30 £100.00 net (£125.00 gross)2 n/a £1,935.20
Using salary exchange:
no employer National Insurance saving passed on		 £2,352.943 £261.09 £156.65 £0.00 £147.06 £1,935.20
Using salary exchange:
full employer National Insurance saving passed on		 £2,352.94 £261.09 £156.65 £0.00 £167.354 £1,935.20

1This is in addition to the 5% pension contribution the employer is already paying.

2Before salary exchange the employee was paying a pension contribution of £100 net a month through relief at source. When this is paid into the pension plan it is grossed up to £125.

3Because they are using salary exchange, there is a reduction in take home pay which is calculated by grossing up the net pension amount by 20% income tax as they are basic rate taxpayer, and 12% National Insurance ((100 - (20 + 12)) /100 = 0.68). These figures would be different for higher and additional rate taxpayers. So, in our example above, gross pay is reduced by £147.06 (£100/0.68) and the employer will make an additional contribution equivalent to this amount.

4If the employer passes on their full National Insurance saving then the additional employer contribution is increased by 13.8% and becomes £167.35 (£147.06 x 1.138).

 

Take home pay increases

  Gross pay Income tax National Insurance Employee Pension Additional employer contribution1 Take home pay
Before salary exchange £2,500.00 £290.50 £174.30 £100.00 net (£125.00 gross)2 n/a £1,935.20
Using salary exchange
no employer National Insurance saving passed on		 £2,375.003 £265.50 £159.30 £0.00 £125.00 £1,950.204
Using salary exchange
full employer National Insurance saving passed on		 £2,375.00 £265.50 £159.30 £0.00 £142.255 £1,950.20

1This is in addition to the 5% pension contribution the employer is already paying.

2Before 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.

3Using salary exchange the employee sacrifices £125 a month reducing their salary from £2,500 to £2,375 a month.

4By contributing to their pension through salary exchange their take home pay will increase by £15 (£1,950.20 - £1,935.20).

5As the employee’s pay has reduced by £125, the employer will pay £125 x 13.8% = £17.25 less in employer National Insurance contributions. If this is paid as an additional contribution into the plan the contributions will rise to £125 + £17.25 = £142.25.

Further information on salary exchange

Disclaimer

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.