Changes to NI on July 6 2022 increased the NI earnings threshold to £242 a week, (£1,048 a month, £12,570 a year).
NI savings will therefore apply to earnings exchanged above the threshold of £242 a week, (£1,048 per month) for tax year 2022-23 (as no NI is paid on earnings below this level).
Exchanges on earnings between the earnings threshold and the upper earnings limit between £242 and £967 a week (£1,048 and £4,189 a month) after November 6 2022 will normally produce a NI saving for the employee of 12 per cent.
Exchanges in earnings above the upper earnings limit of £967 per week (£4,189 per month) after November 6 will produce a 2.00 per cent NI saving for the employee.
Taxpayers could also benefit because a reduction in their salary could mean reducing, or eliminating, the high income child benefit charge on income above £50,000. You might also use salary exchange planning – for a taxpayer with income between £100,000 and £125,140 – to reclaim the personal allowance in addition to the income tax and NI savings.
In addition, for higher rate and additional rate taxpayers there is a cash flow advantage for making pension contributions through salary exchange. The benefit of higher rate tax relief is felt immediately rather than having to claim on a self-assessment tax form.
Increasing pension or increasing take home pay?
Once the employer has set up the salary exchange and thereby established an employee saving from reduced NI, there are two options to consider:
- the same pension contribution can be made at a lower cost to the employee, which will increase their take-home pay, or
- a larger pension contribution can be made without affecting the employee's net take-home pay.
Benefits for the employer
Employers do not pay NI on pension contributions for employees. So, exchanging an employee's earnings usually means that the employer will pay less NI than before.
Employers usually pay NI on all earnings above the threshold, so the employer will normally see a saving of 13.8 per cent on the exchanged amount – unless it was for an employee under 21 or an apprentice under 25.
Many employers often agree to share part or all their NI saving with the employee, by boosting their pension contribution. At the same time, many employees see the flexibility of having salary or bonus exchange as a valuable benefit. That, in turn, can help the employer attract and retain staff.
Finally, employers can claim tax relief on the contribution as a business expense in the same way as if they had paid a salary.
Example of salary exchange
Let’s look at a specific example. Our employer, TRS Limited, has two employees, Tina and David, both aged 35 and earning £40,000 gross a year. They have a pension scheme that deducts a 5 per cent employer and 5 per cent (4 per cent net) employee contribution of gross salary. They both have the standard personal allowance.
Tina wants to increase her pension contributions while David wants to increase his take home pay. Assuming the employer agrees to pay 100 per cent of their NI savings, the position would be as follows.*
