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Employers: here’s how to save on the 1.25% National Insurance rise

Here's what the rise in National Insurance could mean for your business and how you could use salary sacrifice to save on your employers’ National Insurance bill.

In September Rishi Sunak announced the rise of employees and employers’ National Insurance by 1.25% from April 2022. If you’re an employer then the rise will have a big impact on your wage bill.

What does the 1.25% National Insurance rise mean for my business?

The rise in employer’s National Insurance couldn’t come at a worse time for businesses. Many employers are facing rising wage bills. This is because staff shortages and Brexit are pushing up wages in some sectors. On top of this, many businesses are struggling to recover financially from closures during the Covid 19 lock-downs.

The employers’ National Insurance rise adds to these woes. Employers could pay an extra £265 per year tax for an employee earning £30,000 (based on an extra 1.25% paid on earnings between £8,040 and £30,000). If your business employs 10 staff members earning an average of £30,000 then your employer’s National insurance bill could go up by £2,650 per year.

Employees’ National Insurance is also rising by 1.25% so your staff will end up with less money in their pocket.

How is employers’ National Insurance calculated?

Employers’ National Insurance is payable on top of an employee’s salary. It’s different from employees’ National Insurance which is taken out of an employee’s salary.

Employer’s National Insurance is calculated on an employee’s basic gross salary, over a certain limit per month. Anything earned over this limit is currently taxed at 13.8%. For example, if an employee earns £2,000 per month then £1,263 (£2,000 minus £737) will be taxed at 13.8%, so the employer’s National Insurance payable will be £174 per month. This tax cost is on top of the salary paid to your employee.

From April 2022, the employer’s rate of National Insurance is going up to 15.05%. For example, if an employee earns £2,000 per month then £1,263 (£2,000 minus £737) will be taxed at 15.05% so employer’s National Insurance payable will be £190 per month.

How can I save on Employer’s National Insurance

The only way to reduce your employer’s National Insurance bill is to reduce the amount you pay employees. The good news is that there is a way to do this without reducing the amount of money in your employees’ pockets.

So what’s the secret? It’s a process called salary sacrifice. Employees voluntarily reduce their gross salary and the wages they give up are paid directly into their work pension scheme.

For example, someone earning £3,000 per month and paying 5% into their company pension scheme could decide to pay in that money through salary sacrifice. They would agree to a reduced salary of £2,850 per month. £150 per month would be paid directly into the employee’s company pension scheme. The employee would save on National Insurance as the £150 paid into their pension scheme is tax free. In addition, employers’ National Insurance would be calculated on their reduced salary of £2,850 per month. From April 2022, this would save your business £23 per month (based on £150 taxed at 15.05%).

How does salary sacrifice work?

Salary sacrifice works by an employee agreeing to reduce their salary. The difference between their original salary and reduced salary is paid directly into their company pension scheme.

Speak to your accountant to find out more about how salary sacrifice could work for your business. Your employees will need to fill in a form to set up salary sacrifice on their wages. It is their decision whether or not to do salary sacrifice on their pension payments. If an employee agrees to do salary sacrifice then you will need to provide them with a new employment contract reflecting the changes.

Some employees may choose not to do salary sacrifice. This may be because they don’t want a reduced gross salary or it may be because they don’t understand the benefit to them. You may want to work with your accountant to draft a letter explaining the benefits of salary sacrifice to your employees. They would save on employee’s National Insurance on amounts paid into their company pension scheme through salary sacrifice.

Are there any disadvantages to salary sacrifice?

Some employees may choose not to do salary sacrifice. There are some disadvantages for employees as a reduced gross salary may affect their ability to apply for finance. Mortgage companies and credit card companies tend to ask for the employee’s gross salary as part of their affordability assessment.

Please note that tax treatment depends on your individual circumstances and may be subject to change in the future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.

Alice Guy

Alice Guy is a Suffolk-based business and personal finance writer. She trained with KPMG in London as a Chartered Accountant before working as a business analyst for Tesco Plc. Alice has personal experience surviving on a tight budget when she took time out to care for her young family. She loves to write about business finance, saving and investing—all the money stuff we were never taught at school.