Salary sacrifice turbo boost

The tax announcements made on 7 September will have a bigger impact on a lot of people than the rather quieter Budget held at the end of October. The temporary increase in National Insurance (NI) rates for 2022/23, followed by the introduction of the new Health and Social Care Levy (HSCL) in 2023/24, will hit take-home pay for millions, and don’t forget there is also an increase in all dividend tax rates from April 2022.

All of this was confirmed in the Budget, alongside one small piece of good news for taxpayers – unlike the allowances for Income Tax, which have all been frozen for five years – we will see increases to the National Insurance 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 CPI figure of 3.1%, this means the lower earnings limit will rise from £9,568 to £9,880 – slightly softening the blow of the 1.25 percentage point increase that employees, employers and the self-employed will have to pay.

Frozen Income Tax allowances and increased NI all mean taxpayers will be paying more from next year. With that in mind, the already attractive option of salary sacrifice just got supercharged.

From April 2022, the savings for employers will be 15.05% on all contributions where earnings are above the secondary threshold (which is set to rise to £175/week). For an employee making a £40,000 contribution out of earnings above the threshold, this saves the employer £6,020. The employer could, of course, pass some – or all – of this saving on to the employee if desired.

The employee themselves could save up to £5,300 in NI contributions if the whole salary sacrifice fell between the primary threshold and upper earnings limit.

It’s also worth remembering that from 2023/24, when NI rates return to current levels and the HSCL comes into play instead, salary sacrifice will be effective in reducing liability for this too. For older employees above state pension age, it is worth noting that, although they do not pay NI (albeit their employers do), they will still be liable for the HSCL.

For these older workers who don’t pay NI, there is currently no tax advantage to salary sacrifice over making personal pension contributions, unless their employer passes on some of their savings. This will change from April 2023, when salary sacrifice will look the more attractive option for this cohort too. As both the employee and employer are subject to the HSCL, the total savings will be 2.5% on earnings above the threshold, in addition to the employer’s NI savings.

Alongside all this, we have the increase to the Dividend Tax rates from April next year – from 7.5%/32.5%/38.1% to 8.75%/33.75%/39.35% – an increase of over 16% on the basic rate. This is another boost to the case for making contributions via salary sacrifice: put your money into your pension to invest so you avoid the Dividend Tax hike.

There had been some fears that there could have been some tinkering with the salary sacrifice rules for pension contributions, as they are becoming almost too attractive. With the Budget safely out of the way, it looks like we’re on the back straight, with DRS available to help us overtake some of the tax rises – at least until we reach the next corner of the track.

This article was previously published by New Model Adviser