So will Chancellor seek to restrict salary sacrifice?
Chancellor Rachel Reeves in her Budget tomorrow is widely expected to raise National Insurance Contribution rate for employers by 1 to 2 per cent, and is also expected to lower the threshold at which employers start paying the tax – with the two measures combined to raise anything up to £20billion.
Employers currently pay NI at 13.8% on a worker’s earnings above £9,100 a year or £175 a week. A two percentage point rise in NI to take the employer rate to 15.8% would raise about £18billion a year according to published Treasury data – but any rate increase looks like it will be combined with a cut to the £9,100 threshold. Small businesses could be partially protected by increased allowances. Employers with NIC bills of £100,000 or less receive an allowance on the first £5,000, which is expected to rise to £6,000.
Gary Smith, Partner in Financial Planning and retirement specialist at leading wealth management firm Evelyn Partners says: ‘While It is now thought unlikely there will be an NI charge on employers’ pensions contributions after the impact on the public sector was deemed too politically risky, that’s not the end of the story for workplace pensions. Because on the one hand, an employer NI increase would make pension schemes operating on a salary sacrifice basis more attractive to employers – which could mean more employees end up benefitting from them. While on the other, that does raise the risk of the Budget also including a crackdown on salary sacrifice.’
Smith explains: ‘This NIC rise could be a significant cost to employers, and possibly have a knock-on effect on hiring and remuneration plans.[1] But employers will also review their benefit offering to ensure that they are getting value-for-money in light of this potential increase to overall costs. Notably, an opportunity may arise for employers to offset some of this cost through the use of a salary sacrifice pension scheme, including bonus sacrifice, where that’s not already in place.’
Salary sacrifice (also known as salary exchange) is a formal arrangement between an employer and an employee whereby an employee gives up part of their salary in exchange for non-cash benefits. The benefits are not subject to income tax or NICs so their taxable salary is reduced. Pension contributions via salary sacrifice pensions are a tax-efficient way for employers and employees to pay into a workplace pension scheme.
Smith continues: ‘They can help employees increase their take-home pay and help employers lower their National Insurance contributions. However, despite the financial benefits to both the employer and employee, many organisations still do not operate a salary sacrifice arrangement. If the Chancellor increases employer NICs, these employers could look towards salary sacrifice pension schemes to reduce costs.
‘Let’s assume the Chancellor is proposing to increase the employers’ NI rate from 13.8% to 15.8%. Say that the employer currently has a workplace pension scheme set up that is not written on a salary sacrifice basis. The employer would currently pay NI on the full salary of each employee above the lower threshold. Let’s say the wage bill was £1m above the lower level, this would make the employer NI bill currently £138,000, increasing to £158,000 should the NI rate go up to 15.8%.
‘On a normal workplace pension scheme the employees would pay 5% of salary into the pension, which would be £50k in this example. If the employer converted the scheme to salary sacrifice, this would reduce the wage bill to £950,000 and the NI would reduce to £150,100 (assuming 15.8% rate), a saving to the employer of £7,900.
‘But the corollary of all this is that the Chancellor could seek to protect the Treasury revenue from the NIC increase by restricting salary sacrifice. She could announce new legislation that stops new salary sacrifice arrangements, or include them in the assessment of employers NI, and this has been done previously. If she wanted to be really aggressive she could seek to neutralise all existing salary sacrifice arrangements, and this would raise a lot of tax.’
—
[1] Evelyn Partners’ calculations show that an employer with an annual wage bill of £5million across 100 employees would currently have an employer NIC liability of approximately £564,000. An increase of 1.25% would increase that amount to approximately £615,500. This means that a 1.25% increase in the employer NIC rate would roughly translate to an increase in employer NIC costs of 9%.