Is salary exchange* a sacrifice worth making? Paul Andrews, Director at Corinthian Benefits Consulting Limited, looks at the implications of the upcoming increase.

In April 2022 National Insurance contributions will increase. But how will this increase affect employees? And what are the benefits, or lack of, for salary exchange schemes?

What is salary exchange?

Salary Exchange schemes allow employees to use some of their gross salary (before tax) to pay for a number of approved benefits – including childcare, pensions, cycle to work schemes and low emission vehicles. Certain benefits come with additional caveats; for example, if a car emits more than 75g/km CO2 then they are taxed as a benefit in kind and exchange schemes must not reduce an employee’s cash earnings below the National Minimum Wage (more information can be found on the gov.uk website here).

What do the April changes mean?

Currently employees pay NICs at 12% for income between £184 and £967 per week. Everything over £967 is at 2%. This is increasing to 13.25% and 3.25% respectively.

It isn’t just employees who will be affected by the rate change. The Employers contribution rate will also rise from 13.8% for income over £170 per week to 15.05%.

In simple terms someone earning the average basic rate salary of £24,100 will pay £180 a year more whilst the average higher rate earner on £67,100 will pay £715 more.

What are the negative sides to salary exchange?

A lower salary can also affect future entitlements to things like maternity or paternity pay, some state allowances and potentially, mortgage applications.

Other employee benefits linked to your salary (such as life insurance) may be affected.

Your employer or benefit provider should be able to explain the effects based on your personal circumstances.

What can you do about the increase?

Unfortunately, nothing can be done to avoid the increase as it is implemented by Parliament and applies to everyone who is paid a salary. Even Directors who pay themselves in dividends will be affected as the rate on dividends taken is also due to rise. So, this could be the time to consider using a salary exchange scheme with your workplace pension in order to reduce the impact it has on your employees and your company.

To discuss any aspect of salary exchange and employee benefits, contact Paul Andrews direct.

Corinthian Benefits is an independent consultancy helping SMEs to shape their company benefits package. For further information, including handy budgeting calculators, visit: corinthianbenefits.co.uk

*Referred to as salary sacrifice by HMRC

 

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