Upcoming changes to employer National Insurance Contributions (NICs) in the Budget could lead to a significant shift in how companies approach salary sacrifice schemes. The government plans to increase employer NICs by up to two percentage points, potentially hiking them from the current 13.8% to as high as 15.8%, while also lowering the threshold at which employers must start paying this tax. The core objective behind these adjustments is to boost revenue for the Treasury.
One major outcome of these changes could be an increased incentive for employers to adopt salary sacrifice schemes. These schemes reduce the taxable salary and, consequently, the NICs owed, offering financial benefits to both employers and employees. Through salary sacrifice, employees can exchange part of their salary for non-cash benefits such as pension contributions, which are exempt from income tax and NICs. With higher NIC rates on the horizon, salary sacrifice pensions could become even more attractive, prompting broader adoption among companies and their staff.
Gary Smith of Evelyn Partners points out the dual nature of this issue. On one hand, higher employer NICs might lead more employers to implement or expand salary sacrifice schemes, indirectly benefiting employees. On the other hand, a Budget that restricts the use of these schemes could emerge to safeguard the anticipated additional NIC revenue. If left unregulated, the financial burden on employers could be significant, potentially impacting hiring practices and overall compensation.
Smith’s analysis offers a stark illustration of the financial impact of this rate hike. For instance, an employer with 100 employees and a £5 million wage bill could see its NIC liability rise from about £564,000 to £615,500 if the rate increases by 1.25 percentage points, translating to a 9.1% rise. Facing such increased costs, some employers may seek to mitigate expenses through salary sacrifice arrangements.
Moreover, an aggressive crackdown on these schemes by the Chancellor could neutralize existing salary sacrifice arrangements, generating substantial tax revenue but disrupting current financial plans for both employers and employees. This potential crackdown might also affect other salary sacrifice-based benefits, such as car leasing programs for electric vehicles (EVs). Companies like Alphabet argue that salary sacrifice schemes are crucial in promoting EV adoption, reducing carbon emissions, and aiding firms in meeting net-zero targets.
This debate encapsulates the broad spectrum of concerns from various industry stakeholders regarding the potential conflict between increased NICs and the regulatory stance on salary sacrifice schemes. Pensions and benefits experts warn that stringent restrictions on these schemes could undermine their financial and environmental advantages. The government’s final decision will be pivotal, balancing the need for increased revenue against the potential economic and environmental consequences.
In conclusion, the speculated adjustments to NICs and the potential regulatory crackdown on salary sacrifice schemes leave stakeholders waiting in apprehension. The final outcome would likely have significant repercussions on both financial planning and environmental efforts.
