Caught up in the recent merry-go-round of new Prime Ministers and Chancellors of the Exchequer, National Insurance (NI) has certainly had a colourful year.
Contribution rates for both employers and employees originally rose by 1.25% on April 6th, but this rise was subsequently cancelled with effect from November 6th.
So, Class 1 NI contributions – paid by most employees under State Pension age – are now still charged at a rate of 12% to those earning between £242 and £967 a week. Those earning over £967 a week still pay a rate of 2%.
This was in fact the second piece of good news within a few months that affected people paying employees’ NI, because on July 6th this year there was also an increase in the NI threshold – the level at which one starts having to make contributions.
The previous threshold of £9,880, which had come into force this April, was hiked to £12,570 to make it the same as the Income Tax Personal Allowance.
Nevertheless, despite these two rounds of savings, some employees are still paying more NI than they need to.
Although the matter has previously gone largely under the radar, employees who wish to upgrade group private medical insurance (PMI) cover to include spouses, partners or dependaents may be able to save on employees’ NI simply by tweaking the way in which it is deducted.
If the cost is taken from the employee’s gross pay and then added as a P11D benefit, the employee can save on NI on the upgrade – although it makes no difference to the employer, who must still pay NI on the P11D benefits.
Employees don’t obtain Income Tax relief on their upgrade premiums but the NI savings they realise will certainly be better than nothing. For example, a basic rate taxpayer paying an upgrade of £100 a month would save £12 a month.
Often clients don’t ask us about the basis of deduction for dependaents’ cover, so we suspect there could be a number of companies not doing this correctly. But making the adjustment can play its part in helping to keep PMI premiums affordable at a time when the cover has never been needed more.
The NHS waiting list in England has hit an all-time high of 7 million—some 387,000 of whom have been waiting over a year for specialist care after GP referral.
Ironically, the recent U-turn on the 1.25% NI increase will do little to help reduce these figures, as the rise had been part of the Government’s plan to fund tackling the backlog.
Initially, the extra money was going to go towards easing pressure on the NHS and after that it was going to be directed towards the social care system – which would in turn have also helped the NHS by reducing ‘bed blocking’ from older people.
Further NI savings for both employees and employers can be made if companies use salary exchange for certain benefits specifically exempted from changes introduced in 2017 to reduce the approach’s appeal. These include pensions contributions, up to £500 of pensions guidance or advice, Ultra Low Emission Vehicles and Cycle To Work schemes.
Salary exchange works by employees agreeing to give up a proportion of their salary in return for receiving such non-cash benefits from their employer.
Because employees have a lower overall salary, they gain from paying less NI.
Additionally, employers can benefit from having their NI contributions reduced and, because they often agree to share part of this saving with employees by enhancing their pension contributions or other benefits, this can create a further win for employees.
Salary exchange is not necessarily suitable for all workforces because there are some potential downsides to be considered. But, with the Bank of England now forecasting a two-year recession, employers can’t afford to look too many gift horses in the mouth. So, it’s worth them checking whether the approach is appropriate to their own organisation.
If you would like more information from Chase de Vere on implementing salary exchange or on other ways of achieving savings on your employee benefits then please don’t hesitate to contact us.
Content is correct at the time of writing and is intended for general information only and should not be construed as advice.