Why salary sacrifice can be used to offset the forthcoming tax rise

The Budget last month turned out to be a rather subdued affair in the end, which means the tax changes announced on 7 September will have a much greater impact on a greater number of people.

This day of tax hikes, an unusual event outside a Budget, saw the government announce a rise to national insurance (NI) rates for 2022/23, followed by the introduction of the new health and social care levy (HSCL) from 2023/24, to help pay for the NHS backlog caused by Covid-19 and reforms to social care.

These changes will hit the take-home pay of millions in the UK. And do not forget, there is also an increase in all dividend tax rates from April 2022.

All of this was confirmed in the Budget, along with one small piece of good news for taxpayers. Unlike the allowances for income tax, which have been frozen for five years, we will see increases to the NI limits and thresholds for 2022/23 (excluding the upper earnings and upper profits limits, which will stay at current levels in line with the higher-rate threshold for income tax).




Based on September’s consumer price index figure of 3.1%, this means the lower earnings limit – the level from which employees start paying NI – will rise from £9,568 to £9,880, slightly softening the blow of the 1.25 percentage point increase in NI that employees, employers and the self-employed will have to pay.

A heavier load

Frozen income tax allowances and increased NI mean taxpayers will pay more from next year. In fact, the tax burden is set to be the highest since the Labour government of the early 1950s, according to the Office for Budget Responsibility.

In light of this, salary sacrifice is now even more attractive. This arrangement allows employers to reduce employees’ take-home pay in return for a non-cash benefit such as pension contributions or childcare vouchers, and in the process reduce the NI payable by the employer and employee, as well as the employee’s income tax.

Employers only start paying NI on employee wages above the secondary threshold. The secondary threshold is due to rise by 3.1% next April, to £175 per week. This means the NI savings for employers will be 15.1% on all salary sacrifice contributions where earnings are above the secondary threshold.



For an employee making a £40,000 contribution out of earnings above the threshold, this saves the employer £6,020. The employer could pass some, or all, of this saving on to the employee if they wish.

The employee could save up to £5,300 in NI contributions if the whole salary sacrifice fell between the primary threshold (the point at which employees start paying NI) and the upper earnings limit (the point at which they pay a reduced level of NI).

From 2023/24, when the HSCL comes into play, salary sacrifice will also be effective in reducing liability for this too. And for employees above state pension age, it is worth noting that, although they do not pay NI, they will be liable to the HSCL when it comes into effect.

For these older workers, there is no tax advantage to salary sacrifice over making personal pension contributions, unless their employer passes on some of the savings. This will change from April 2023, as both the employee and employer will be subject to the HSCL. The total savings will be 2.5% on earnings above the threshold, in addition to the employer’s NI savings.

Dividend tax rates will also increase next April – with each rate rising by 1.25% from 7.5%, 32.5% and 38.1% to 8.8%, 33.8% and 39.4%, respectively.



This represents an increase of more than 16% on the basic rate and is another reason to make contributions via salary sacrifice. Put your money into your pension to invest so you avoid the dividend tax hike.

There had been fears that the government would tinker with salary sacrifice rules for pension contributions as they are becoming almost too attractive. With the Budget behind us, it looks like we are on the back straight, with salary sacrifice options available to help us overtake some of the tax rises – at least until we reach the next corner of the track.

Original Article - https://citywire.co.uk/new-model-adviser/news/salary-sacrifice-is-even-more-attractive-after-sunak-s-tax-raid