Beating the National Insurance Increases - Some Suggestions

In April, national insurance (NI) rates were increased for employers, employees and the self-employed. For employers, the rate was increased to 12.8% from 11.8% and for employees and the self-employed there is an extra 1% charge on all earnings or profits without limit.

An employee earning £30,000 faces an additional NI charge of over £250 in 2003/04 and someone on £60,000 will see the charge rise by over £600. On top of this the employer will be paying an extra 1% on all earnings above £89 per week paid to employees. No wonder employers and employees might be looking at ways of reorganising remuneration packages to save some NI. One way of doing this is to consider some form of salary sacrifice scheme. The idea behind this is that the employee agrees to a cut in gross pay (the salary sacrifice) and the employer then uses the sacrificed sum to provide a more NI efficient vehicle. Here are some ideas to consider.

Pension contributions paid by the employer to an occupational pension scheme or direct to the employee’s personal pension scheme will avoid an NI charge and indeed income tax.

Think about taking additional benefits in kind rather than salary. The employer will still have to pay NI on the majority of these but the employee will suffer only an income tax charge and no NI. In the case of employer provided mobile telephones or home computer equipment within certain monetary limits then even the income tax charge is avoided.

The government is keen to encourage employees to take shares in their employer company. If an employee receives unquoted shares that are not readily convertible into cash there is no NI liability on their value. Better still shares received via an Inland Revenue approved share scheme may give tax advantages as well as NI savings.

Having said all of this the Inland Revenue as you might imagine is not terribly keen on salary sacrifice schemes. Consequently it is important to get the paperwork right so that the scheme is effective. In simple terms, only future salary can be sacrificed. The sacrifice is achieved by varying the employee’s terms and conditions of employment so that there is an entitlement to a lower level of cash remuneration and a non-cash benefit.

Whilst such a scheme can be very attractive to both employer and employee, the employee faced with a possible salary sacrifice may wish to consider the effect on:

their future right to the original (higher) cash salary
any pension scheme being contributed to
entitlement to Working Tax Credit or Child Tax Credit
entitlement to State Pension or other benefits such as Statutory Maternity Pay.

A salary sacrifice should not reduce your cash pay to below the National Minimum Wage.

If you are an employer contemplating a salary sacrifice scheme or an employee wishing to consider the implications of such a scheme please talk to us. The sooner a scheme is in place the sooner you can start to benefit from NI savings.