In recent days it has been reported that the government are going to raise National Insurance payments in order to fund social care reform and help clear the NHS backlog.
At the time of writing no official announcement has been made and we are not certain on the level of increase but it is expected to be in the region of 1%-2%.
This will effectively be a tax increase so it’s important to understand the impact on your finances and how you can legitimately avoid this increase. Particularly if you wish to have control over how your income is allocated rather than the government.
How National Insurance works and the impact of the rumoured changes
Money collected from National Insurance tax is used to pay some state benefits like the State Pension, Statutory Sick Pay, maternity leave and unemployment benefits.
The tax is collected from your salary or self-employed profits, separate to Income Tax.
National Insurance could be considered a stealth tax in that it can be difficult to understand and you may not realise but businesses have to pay their own rate of National Insurance on employee earnings. This is not a figure you will see.
National Insurance rates
In order to keep things simple:
- If you’re employed you won’t usually pay any National Insurance on the first £797 you earn every month.
- You will pay 12% of your monthly salary between £797 and £4,189.
- Then 2% on any monthly salary over £4,189.
So, if you were earning a gross salary of £100,000 per year (£8,333.33 per month):
- You would pay 12% on £3,392 (£4,189 – £797) = £407.04
- 2% on £4,144.33 (£8,333.33 – £4,189) = £82.89
- Total National Insurance per month = £489.93
Your employer would also pay employer National Insurance too at 13.8% of your monthly salary above £737. So a further £1,048.29 a month in National Insurance tax using the example above.
Smaller businesses need to be mindful of this particularly when trying to work out the cost of new staff. Business owners will need to factor in compulsory company pension contributions too!
Impact of a 2% rise in National Insurance
At the time of writing we don’t know how any rise would work in practice. Will it be added to the lower level rates and upper level rates? Meaning a potential 14% and 4% for employees.
Will it apply to employer contributions too? So potentially a 15.8% tax for employers.
Looking at a potential worst case scenario applying a 2% rise to all levels for employees and employers National Insurance, using the £100,000 salary example above, the difference in monthly payments would be as follows:
Pre Potential National Insurance Changes
Post Potential National Insurance Changes
Difference Per Month
Using pension contributions to save National Insurance tax
By making pension contributions in a certain way you can legitimately save paying a proportion of your National Insurance tax as well as reclaiming Income Tax.
We have written many times on the benefits of saving Income Tax with pensions. For this article we are going to focus on National Insurance savings.
There are essentially two ways to make a pension contribution:
- Relief at source method – Here you pay into a pension from your net pay.
- Net pay method – Here you pay into a pension from your gross pay before tax is taken off.
It’s the ‘net pay’ method that you need to look at in order to save yourself some National Insurance tax.
If you’re employed you may be able to do this via salary sacrifice. This is where you agree to give up some of your salary in return for a pension contribution.
The benefits of doing this mean you and your employer will pay less Income Tax and National Insurance and your take home pay should increase.
Your employer may even use the SMART (Save More and Reduce Tax) method of salary sacrifice.
Here, the amount you save in National Insurance is added to your pension and if your employer is feeling really generous, they will add their employer National Insurance saving into your pension too!
If we use the example above of a person earning £100,000 gross per year, making a 10% employee pension contribution which is then matched by their employer, the Legal and General salary sacrifice calculator shows the difference and tax saved.
Over time these additional savings add up and compound through a good investment strategy.
Using some form of net pay pension contribution method is great for business owners too as it can either save some money on employer National Insurance contributions or provide an added benefit to your employers.
What should you do next?
- Speak to your employer to find out what method they are using for your company pension scheme.
- If they are not using salary sacrifice or SMART ask them why not and try to explain the benefits to them. Tax savings all round!
- If your employer is already using salary sacrifice see if you can increase your pension contributions to save even more tax.
If you are planning to retire in the next few years and you want further ideas on how to maximise your savings please get in touch and book a no-obligation free 15-minute call.
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