Mitigating the NI rise

NI rise confirmed

The government has committed to an across-the-board addition of 1.25% to NI rates from 6 April 2022. Based on the average UK wage of £31,000 per annum (according to the Office for National Statistics), the NI rate rise will cost employees and employers a total of almost an extra £600 per year.

Playing the percentages

In practice higher earners will be hit proportionately harder by the NI hike than the lower paid. For example, on an annual salary of £24,000 employees’ and employers’ NI bills will be 8% and 7.19% greater respectively. Whereas, for someone earning £80,000 per year the NI increases are 15.3% and 8.66%. While it seems fair that those who earn more should pay more, any increase in taxes is unwelcome no matter what the level of earnings is.

Dividends partial escape

To prevent director shareholders of companies escaping the NI rise by taking a greater part of their income as dividends (which are not liable to NI) in place of salary, the dividend tax rates have also been increased by 1.25%.

The dividend rate rise affects director shareholders but not their companies. This means that despite the government’s efforts there’s a saving to be made by reducing the salary (where it would be liable to NI) and increasing dividends by a corresponding amount. For example, swapping £10,000 of salary for £10,000 of dividends means the company avoids NI of £1,505 which far outweighs the increase in NI.

Savings for employers

While companies can pay dividends to their director shareholders instead of salary to escape part of the rise, that option isn’t open to their employees who don’t own shares in the company. The good news is that there’s an alternative which can allow many employees and their employers to mitigate the NI increase.

Salary sacrifice (HMRC calls them optional remuneration arrangements (OpRAs)) can reduce NI costs for employees and employers. An OpRA involves an employee giving up some of their salary in exchange for a benefit in kind. While the scope for these was severely curtailed in 2017, there’s still room for a successful OpRA.

Limited scope for OpRAs

Anti-avoidance rules block most tax and NI advantages of OpRAs but several remain, e.g. cycle to work schemes and pension contributions. The latter is especially useful as auto-enrolment means that many employees contribute to their employer’s workplace pension scheme.

Using a firm’s workplace pension scheme, an OpRA can be tailored to reduce or in some cases eliminate the extra NI costs for employees and employers. In broad terms, it involves the employees reducing the salaries they use to pay their workplace pension contributions which the employer then pays instead.