How can salary sacrifice save on National Insurance contribution 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 contribution 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 sacrifice, the employer could save £22,500 (£150,000 x 15%) a year on their National Insurance contributions.
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, is paying a 5% pension contribution and is over age 21.
Monthly take home pay stays the same
| |
Gross pay
|
Income tax
|
National Insurance
|
Employee contribution
|
Additional employer contribution1
|
Take home pay
|
| Before salary sacrifice |
£2,500 |
£290.50 |
£116.20 |
£100.00 net (£125.00 gross)2 |
N/A |
£1,993.30 |
Using salary sacrifice:
no employer National Insurance saving passed on |
£2,361.113 |
£262.72 |
£105.09 |
£0.00 |
£138.89 |
£1,993.30 |
Using salary sacrifice:
full employer National Insurance saving passed on |
£2361.11 |
£262.72 |
£105.09 |
£0.00 |
£159.724 |
£1,993.30 |
1This is in addition to the 5% pension contribution the employer is already paying.
2Before salary sacrifice 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 sacrifice, 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 8% National Insurance ((100 - (20 + 8)) /100 = 0.72). These figures would be different for higher and additional rate taxpayers. So, in our example above, gross pay is reduced by £138.89 (£100/0.72), and the employer will make an additional contribution equivalent to this amount.
4If the employer passes on their full National Insurance contribution saving then the additional employer contribution is increased by 15% and becomes £159.72 (£138.89 x 1.15).
Monthly take home pay increases
| |
Gross pay
|
Income tax
|
National Insurance
|
Employee contribution
|
Additional employer contribution1
|
Take home pay
|
| Before salary sacrifice |
£2,500.00 |
£290.50 |
£116.20 |
£100.00 net (£125.00 gross)2 |
N/A |
£1,993.30 |
Using salary sacrifice:
no employer National Insurance saving passed on |
£2,375.003 |
£265.50 |
£106.16 |
£0.00 |
£125.00 |
£2,003.344 |
Using salary sacrifice:
full employer National Insurance saving passed on |
£2,375.00 |
£265.50 |
£106.16 |
£0.00 |
£143.755 |
£2,003.34 |
1This is in addition to the 5% pension contribution the employer is already paying.
2Before salary sacrifice 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 sacrifice the employee sacrifices £125 a month reducing their salary from £2,500 to £2,375 a month.
4By contributing to their pension through salary sacrifice their take home pay will increase by £10.04 (£2,003.34 - £1,993.30).
5As the employee’s pay has reduced by £125, the employer will pay £125 x 15% = £18.75 less in employer National Insurance contributions. If this is paid as an additional contribution into the plan the contributions will rise to £125 + £18.75 = £143.75.
