NICs and pension salary exchange schemes

Nick Bustin at haysmacintyre asks whether pension salary exchange schemes are an effective way to manage the increase in employer National Insurance contributions in the UK

 

Following the UK Government’s Autumn Statement, businesses from all sectors were left reeling with the news that not only had the National Minimum/Living Wage rates been significantly ‘hiked-up,’ but they were being expected to fund a considerable proportion of the Government’s efforts to fill-in the now infamous ‘black hole’ inherited after the election, via increases in employer National Insurance contributions (NIC).

 

Autumn budget changes

To recap, the headline rate of employer national insurance contributions (NIC) is going up by 1.2% to 15% with effect from 6 April 2025. Furthermore, the point at which NIC will be payable by employers will go down from £9,100 to £5,000.

 

The increase in employer NIC will average around £900 per employee or, more pointedly, add over £225,000 to the wage bill for an employer with 250 employees. Whilst all employers will benefit from the Employer’s Allowance, this will in reality have little impact for most businesses. 

 

Unsurprisingly, employers have been actively looking at how they can manage the increase in the employment costs they are confronting. Whilst thoughts will no doubt gravitate towards customer pricing or deferring investment costs, employee costs will be near the top of the agenda. One option includes the use of pension salary exchange.

 

Whilst not a new concept, a pension salary exchange is an option that all employers should consider to help mitigate the impact the increases will have. Under a pension salary exchange employees forego or ’sacrifice’ some of their monthly salary in return for increased employer pension contributions.

 

Employers will be the greater beneficiary by virtue of the savings in the amount of NIC they will pay but employees will see a modest increase in their ‘take home’ pay. At the same time, the employer will take on responsibility for paying the pension contributions in full. 

 

Benefits for employers 

Pension salary exchange schemes help employers make their salary budget stretch a bit further. Put simply, for every £100 the employee agrees to sacrifice, the employer will see a £15.00 reduction in their NIC bill. This will be further enhanced by 0.5% for those employers with an annual wage bill in excess of £3m per annum who pay the Apprenticeship Levy. This will help to make in-roads into mitigating the impact the increase in employer NIC has created.

 

Historically, many employers share all or part of their NIC savings with employees in the form of additional pension contributions, which can help to generate a greater level of employee engagement. Furthermore, it is not uncommon for employers to take the opportunity to use part of the NIC savings to provide new benefits or incentive awards to their employees.

 

However, the key message is that making use of a pension salary exchange provides employers with the ability to partly reduce the increase in employer NIC will bring from next April. The Government’s decision to delay the date at which the increases will apply to April next year has provided some breathing space for finance directors who are looking at how to balance their budgets.

 

Key advantages for employees

It is also important to consider the NIC increase from the employee’s point of view in light of what a pension salary exchange will mean to them. Basic rate taxpayers will also see a reduction in the amount of NIC they pay by £8 for every £100 they agree to sacrifice. As far as higher and additional rate taxpayers are concerned, the savings will not be so significant and are essentially limited to a 2% saving in NIC.

 

That said, the ability to receive immediate tax relief is a key advantage of the scheme, alongside reducing the need to adjust their PAYE code number which will help to simplify their tax position. Furthermore, this provides an ideal opportunity for employees to consider the amount of salary they wish to sacrifice. For instance, reducing their earnings could bring their salary into a lower tax band or help to preserve child benefit entitlements.

 

Where employers already offer a pension salary exchange, the next few months provides an ideal opportunity to re-engage with employees, especially if there has been minimal take up in the past.

 

Implementing salary exchange schemes

Where employers are not already making use of the arrangement, a key aspect of the exchange will require a variation to the employees’ contractual terms. Employees will need to agree to a reduction in their salary, and in return the employer will agree to pay the corresponding amount in pension contributions on their behalf.

 

Communication is key to the implementation of a successful pension salary exchange. Typically, consideration needs to be given to staff briefings and written communications which clearly set out the advantages and disadvantages connected with a pension salary exchange. It is important that employees are provided with sufficient information to explain what this will mean to them.

 

A word of caution – a pension salary exchange must not take any employee’s pay below the National Minimum or Living Wage limits, so there is a requirement to ensure any employees who are paid at, or close to these thresholds to continue to pay pension contributions outside of any salary exchange.

 

Even so, all employers should at least consider the viability of using a pension salary exchange. Not only to help mitigate the impact of the increase in wage costs being forced upon them, but also to help promote greater employee engagement.

 

The use of a carefully planned pension salary sacrifice will help to provide a favourable platform for employees to save towards retirement and also help to mitigate some of the financial burden which will come into play from next April.

 

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Nick Bustin is Employment Tax Director at haysmacintyre

 

Main image courtesy of iStockPhoto.com and ShaunWilkinson