Over a quarter of employers (29%) claim that the NI hike will have a direct impact on employees’ pay, and one in five (21%) claim that pay increases will be frozen completely for the whole year.
Yet while the tax rise risks denting business confidence, many employers could mitigate this rise by unlocking significant cost savings through salary exchange schemes for their workplace pensions. These schemes would also simultaneously enlarge the value of employees’ pensions pots.
Salary exchange for workplace pensions is an agreement between employer and employee that sees the employee reduce their gross salary in return for the employer covering their share of pension contributions. As the employee now receives a lower gross salary, they pay less income tax and National Insurance contributions on their earnings, with the employer also reducing their NI bill.
For example, a UK employer with 100 staff on salaries of £30,000 could immediately save an estimated £20,700 in NI contributions each year, simply by implementing a salary exchange arrangement with their employees – yet over a quarter (29%) of employers are failing to do so.
The potential saving will be even greater after 1st April when National Insurance is due to go up by 1.25%, increasing the main rate for employees from 12% to 13.25%. From April 2022, employers using salary exchange arrangements would save an extra £22,575 in NI contributions, versus an equivalent firm without this arrangement in place, helping to mitigate the costs of the tax increase.
Robert Cochran, Retirement Expert at Scottish Widows, said: “Many UK firms are facing rising inflation and running costs, disrupted supply chains and a looming rise in National Insurance contributions.
“For individuals, the current economic situation is equally challenging, with living costs such as energy bills and fuel prices rising sharply, meaning their take home pay is stretched increasingly thin. In extreme cases, the planned National Insurance increase could also see some high-earning consumers being taxed as much as 60% of their earnings.
“Workplace salary exchange schemes can play a part in off-setting some of these financial pressures, both for employers and their workforce. All UK employers are required by law to provide a pension scheme for their employees, so there is a real opportunity for them to also implement a salary exchange scheme which would give them more control over their National Insurance contributions and a chance to markedly improve their employees’ financial wellbeing. Employees themselves could add thousands to their pension pots, with only minimal action on their part.
While this can be a complex subject to grapple with, there is help at hand from financial advisers who can clearly articulate the benefits to both employer and employee.”
The positive impacts for employees’ financial wellbeing
The planned National Insurance rise will impact the financial wellbeing of employees, many of whom are already struggling to save due to the spiralling cost of living.
40% of firms polled claimed that the upcoming hike in NI contributions was weighing on their employees’ minds, with concerns it would dent their financial wellbeing and ability to save for the future.
Yet employees on a salary of £30,000 could receive up to £42,100 extra in their pension pots at retirement, simply due to their employer introducing a salary exchange agreement in the workplace and redirecting the NI saving into their pension pot.
Employers are missing out on significant cost savings
As well as mitigating the impact of the NI hike, salary exchange cost savings can be redirected to a firm’s wider offer of employee benefits – helping employers increase the competitiveness of their compensation package and attract talent in an increasingly competitive labour market.
For those firms who use salary exchange, 48% said they were able to improve employees’ financial wellbeing through lower NI contributions, while a further 43% used the cost savings to fund additional employee benefits such as gym memberships or cycle-to-work schemes. 46% even used the savings to increase the bonuses they offer employees.
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