One of the most frequently asked questions we have received in recent weeks is how the proposed 1.25% increase in employer and employee national insurance contributions (NIC) will impact on workplace pension schemes.
For schemes that offer salary sacrifice, the short answer is that both employers and employees are likely to see an increase in the NIC savings they make in the 2022/23 tax year. Schemes that don’t operate salary sacrifice won’t be impacted by the increase and could miss out on significant savings. However, as with virtually all legislative changes, there is more to it.
Firstly, we need to bear in mind that this is still just a proposal; the Health and Social Care Levy Bill is still making its way through Parliament and is subject to change until finalised and passed into legislation. Our comments are based on current understanding and are therefore also subject to change.
In addition, the Levy is being introduced in two phases, firstly as a temporary increase to NIC in the 2022/23 tax year for expediency. Then, having allowed time for the development and implementation of the necessary infrastructure, it will be formally separated from NIC and will operate as a separate stand-alone Levy (in other words, a tax) from the 2023/24 tax year. At this time, it will also apply to working individuals above State Pension age and NIC rates will return to the 2021/22 levels.
Our expectations are that the temporary increase in NIC will not be treated any differently from current NIC and that the relevant employer and employee rates will simply be increased by 1.25% and will be managed as now through payroll as PAYE.
There are currently no caveats or exclusions indicating that there will be a related change to pension salary sacrifice rules. This suggests that employer and employee salary sacrifice NIC savings will correspondingly increase by 1.25%, meaning the employer rate of 13.8% will be increased to 15.05% and the employee rates of 12% or 2% will be increased to 13.25% or 3.25% respectively.
Where employers reinvest some or all of their employer NIC savings in their employees’ pensions, we also expect that to be allowed to continue. However, remembering that salary sacrifice is a contractual arrangement, employers should review their employees’ contract wording in this area and update it if necessary. For example, if a contract explicitly states that 13.8% employer NIC savings will be re-invested as a pension contribution, that might require a different approach from contracts that state that 50% or 100% of employer NIC savings will be reinvested. This is a key area that employers should check.
What the rules will be for the Levy are less clear at this time, especially in respect of salary sacrifice. Given the government is going to the extra effort of establishing it as a new and separate tax rather than legislating to permanently ring fence a proportion of increased NIC, we wouldn’t rule out the possibility of their intention being to treat it differently in areas such as salary sacrifice.
We will provide further updates as and when the legislation is clarified and ultimately finalised. If you have any questions in the meantime, please contact your usual PS Aspire consultant.