The Government has just announced a rise in National Insurance contributions with the aim of funding health and social care. This means higher costs for you each month. But because your employer is offering salary sacrifice (also known as salary exchange), you’ve got an easy way to reduce the increase. Opting into salary sacrifice takes just two minutes.
Read on for the lowdown on what salary sacrifice means, and how to make the switch.
What is the National Insurance rise?
From April 2022 – April 2023, employers and employees will pay 1.25% more National Insurance. After April 2023, a new Health and Social Care levy will be introduced. That’s 13.25% of your earnings between £9,568 and £50,270 and 3.25% on earnings above £50,270.
How does a salary sacrifice pension scheme work?
Salary sacrifice is the most tax-efficient way to pay into your pension. It’s a legitimate scheme: 85% of very large companies are using this method.
In a normal pension arrangement, your employer needs to contribute a minimum of 3% of your qualifying earnings into a workplace pension account, and you make up the rest to a minimum total contribution of 8%.
With salary sacrifice, you agree that your employer will pay the full total contribution on your behalf. In return, you ‘exchange’ or ‘sacrifice’ a portion of your salary equivalent to your usual contribution. The result is that your pension contribution is deducted BEFORE National Insurance tax is taken on your salary. This means you save 3.25-13.25% of your contribution amount under the new programme, depending on your tax bracket.
Example: how salary sacrifice cuts costs
Not paying National Insurance on your pension contribution will mean the increase in National Insurance is not as steep. If you increase your pension contributions, the amount you pay in National Insurance will go down even further, so you could end up paying even less than before – leaving you with more take-home pay.
Annual payments look like:
| National Insurance payments | Before NI rise | After NI rise | With salary sacrifice | With salary sacrifice and employee pension contributions at 9% |
|---|---|---|---|---|
| Employee on £45k | £4,252 | £4,695 | £4,438 | £4,233 |
Are there any downsides to salary sacrifice?
You should be aware of the implications of switching to salary sacrifice, and it’s a statutory duty for your employer to inform you. If you have a Maji account through your employer, you can find out all you need to know by logging in.
If you are getting, or planning to get, statutory benefits such as parental leave, it might be better to opt out during this period, as the amount you receive can be affected. You can do that with a couple of clicks on Maji, and opt back in with another few clicks when you want! Applying for a mortgage shouldn’t be an issue: the majority of mortgage lenders know about salary sacrifice and take this into account when making calculations.
How do I switch to a salary sacrifice pension?
Your employer is already offering you the opportunity to cut your National Insurance costs! All you need to do is log into your Maji account and opt in via your dashboard. Opting into salary sacrifice takes two minutes and you could end up cutting your costs by hundreds of pounds over the year.
Don’t forget, you can contact us through the Maji platform using the pink chat icon if you have questions!
Image credit: Emil @ Unsplash
