salary sacrifice cost saving national insurance rise
4 min read
Pensions for Employers

Take the sting out of the National Insurance increase by switching to salary sacrifice

Catherine Miller

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 and your employees. But before you make plans to take on the extra burden, have you considered switching to salary sacrifice? This alternative pension arrangement can significantly cut NI costs for you and your employees, so switching to salary sacrifice is really a no-brainer. 

You’ll save 15.05% of the pension contribution of each employee who opts in – and your employees can take home up to an extra 13.25% of their contribution amount, too! 

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. Switching to salary sacrifice is a great way to mitigate the pain for your company and your staff.

How does a salary sacrifice pension scheme work?

Salary sacrifice is the most tax-efficient way for you and your employees to pay into their pension. It’s such a win-win that 85% of very large companies are using the scheme. 

In a normal pension arrangement, you need to contribute a minimum of 3% of an employee’s qualifying earnings into their workplace pension account, and they make up the rest to a minimum total contribution of 8%. 

With salary sacrifice, the employee agrees that the employer will pay the full total contribution on their behalf. In return, they ‘exchange’ or ‘sacrifice’ a portion of their salary equivalent to their usual contribution. The result is that the employee’s pension contribution is deducted BEFORE National Insurance tax is taken on their salary. This means both the employee and employer stop paying National Insurance on the portion of the salary that is the employees’ pension contribution. That’s a saving of 15.05% of the contribution amount for you as the employer (under the new programme), and 3.25-13.25% for the employee, depending on their tax bracket. 

It’s a simple administrative change that saves both you and your employees money. Any workplace pension scheme can be converted to a salary sacrifice arrangement, so you won’t need to change your provider.

Example: how salary sacrifice cuts costs

Sigma, a tech company, has 50 employees earning an average salary of £45,000, and making pension contributions of 5% on a basis of qualifying earnings. 

By switching to salary sacrifice, Sigma will save 15.05% of the total value of employee pension contributions because they won’t have to pay National Insurance on this sum. So Sigma stands to save £14,583 right away. And if employees raise their pension contributions by 4%, Sigma saves £26,250 each year! 

Lower-rate taxpayers working at Sigma will reduce their National Insurance by £257, and higher-rate taxpayers by £67. So the increase in National Insurance is not as steep with salary sacrifice.

Annual payments look like:

National Insurance payments Before NI riseAfter NI riseWith salary sacrificeWith salary sacrifice and employee pension contributions at 9%
Sigma (employer)£244,500 £266,626£252,043£240,376
Employee on £45k£4,252£4,695£4,438£4,233

How do I switch to a salary sacrifice pension?

There are a number of statutory and legal requirements to switching to salary sacrifice. You’ll need to make sure you’ve assessed your employees’ eligibility, capped their possible pension contributions, collected informed consent and made contract changes. Plus, you’ll need to store all your records. This can be a hassle. 

Luckily, Maji digitises and automates the process, making it easy and engaging for you and your employees to switch while remaining compliant. We also coach employees to increase their pension contributions, which maximises cost savings for both of you. And your team will also get access to our host of financial planning and educational tools to increase their financial wellbeing across the board. 

We’ll also help your finance team or your accountant ensure your payroll and pension are set up correctly for salary sacrifice, so you can start making savings within a month.

Contact us today to find out more about switching to salary sacrifice with Maji. Or sign up for our free LinkedIn Live webinar for employers on 12th April!

Image credit: Elisa @ Unsplash

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