NI tax hike acts as another blow to savers in cost-of-living squeeze

Savers and Employers alike should be making use of Salary Sacrifice to manage rising costs

Savers can use their pension to counter the impact of the rise to National Insurance (NI), says Penfold, the digital pensions provider.

An employee who earns £30,000 a year and contributes £100 a month into their workplace pension via Salary Sacrifice would save £158 over a year in national insurance taxes, which would reduce from £225.58 to £212.39 each month (full table below).

The government has confirmed that savers will see up to a 10.4% rise in their National Insurance bill. For most people, this will mean contributions rise from 12% to 13.25% - a 1.25 percentage point hike in contributions, equivalent to a 10.4% increase. Under the new rules, employed savers could pay up to £4,189 a month, and 3.25% of their earnings above that. Therefore, someone earning £30,000 would owe £2,707 over the year - £255 more than before this increase.

Salary sacrifice allows savers to pay a small part of their earnings as a pension contribution before tax is deducted. This means the salary the government uses to calculate how much tax you pay is smaller, and so you pay less tax.

Impact for employers

On top of rising costs elsewhere, this increase to NI represents a significant cost to businesses. Research shows that in 2020, employer National Insurance contributions accounted for 25.7% of all taxes borne by the UK’s biggest firms. From April, employers will experience a 1.5 percentage points increase. This means the employer will have to collect 15.3% on most employees' earnings and benefits above £737.01 a month.

Penfold says choosing a Salary Sacrifice workplace pension means that employers can reduce their NI costs as the tax isn’t payable on pensions contributions when paid this way.

As well as these savings, it’s important for employers to remember that they can also offset pension contributions against corporation tax – further minimising their tax bills.

Pete Hykin, Co-founder of Penfold, comments:

“Savers are already being hit with high inflation and rising energy bills and this NI tax hike acts as another blow in the cost-of-living squeeze, with those on lower wages likely to be severely impacted. Unfortunately, communication from the government about the real impact of the tax hike on incomes has been less than straightforward.

“However, what many might not be aware of is that pensions can actually be used by both employers and employees to trim tax bills. Salary sacrifice offers savers National Insurance relief on top of the usual pension tax relief, adding an extra boost to pots.

“By switching to a salary sacrifice pension scheme, businesses can save their employees hundreds of pounds a year - at no extra cost. For businesses who care about their employees and want to attract and retain the best talent, offering a pension which gives them the ability to keep their tax bills under control will be a big selling point for employees.

“Salary Sacrifice, and the ability for pensions to minimise tax bills in general, is something that isn’t spoken about enough and yet another example of where the industry is falling short on educating and engaging people with pensions. More needs to be done to educate employees and employers on these benefits and encourage employers to choose a Salary Sacrifice workplace pension scheme like the one from Penfold, to give employees as much flexibility as possible to deal with rising living costs.”