NICs will rise by 1.25% for employees, employers and the self-employed from April 2022 to fund the Government’s new health and social care levy.
In some scenarios, employees and employers can get around this by striking a salary sacrifice deal to reduce an employee’s gross pay in return for certain non-cash benefits, such as pension contributions.
This is a tax-efficient way to pay or boost pension contributions up to a limit, as the amount of salary exchanged is not liable for income tax or class 1 NICs.
Effectively, the non-cash benefit could become an employer pension contribution while reducing an employee’s NICs liability and also the employer’s NIC liability.
However, going down this route might lead to a reduction in some state benefits and could affect mortgage applications and employee benefits.
Kate Smith, head of pensions at Aegon, said: “The 1.25% rise in NICs from next April increases employers’ payroll costs and will reduce employees’ take-home pay, making salary sacrifice more attractive to dampen the increased costs.
“One way to offset the increased cost and to maintain current take-home pay, or increase pension contributions, is to use salary-sacrifice arrangements, although it may not be possible from April 2023.”