Check tax-efficiency of employee benefits before NICs rates rise

National Insurance payments will rise in April by 1.25% for employers, employees and the self-employed. It’s a hefty extra cost and so, to help mitigate, employers are reviewing their benefits to ensure they are structured in the most tax-efficient way. More on that in a moment.

The background is that on 7 September last year the government announced the creation of the new Health and Social Care Levy to fund investment in the NHS and social care, a tax of 1.25% . The levy will come into force in the tax year starting in April 2023 but, as a temporary measure, all three rates of NICs will increase by 1.25% from this April – that’s for administrative reasons because the Revenue hasn’t got time to introduce an entirely new tax, with a new tax base, hence these temporary measures. 

The increase is a significant one and, to make matters worse, whilst income tax thresholds will rise in April, they will then be frozen for a further four years until April 2026. That means if wages rise more people will find themselves paying a bigger proportion of their income in tax. And then, on top of that, there’s inflation, which is rising fast, meaning the cost of living is getting much more expensive.

So, what can employers do to minimise the impact of all these extra costs? One way is to check your benefits packages are structured in the most tax-efficient way and that is something we are currently helping a number of our clients with. Chris Thomas is a tax lawyer currently advising on this and he joined me by phone to discuss it:

Chris Thomas: “I think it's important to say that there is no one silver bullet for any of this, as you might expect, I suppose, but some of them do deliver quite significant savings and even if you're talking about relatively modest amounts of saving, those will add up when they're multiplied across the employee population. So, if we look at what some of these benefits might be, some of them will be familiar and others perhaps a little bit less. So first and foremost, I think in any discussion about tax efficient benefits, you have to you have to discuss pensions because that is, by some distance, the most tax advantaged benefit that there is that you can provide. Obviously, the vast majority of employers will have a pension scheme in place for their staff but there is then the question as to how actually could you make that more tax efficient than perhaps it currently is? One obvious means of doing that is through salary sacrifice of employee contributions, if that's not something that your organisation already does. It’s not going to be right for everybody, you know, people who are on kind of low incomes, perhaps it's not the right thing for them because there are issues around not falling below the minimum wage and possible impact on statutory benefits entitlements, but for the vast majority of employees it's really quite an attractive means of turning their employee contribution to something that also saves both employer and employee NICs and, sometimes, the employer will pass part of its employer NICs savings back to the employee to make it even more attractive. So, if that isn't something that businesses are currently offering then it’s something they might want to think about doing and, even if they are, there may be a question as to actually are employees sufficiently aware of it, is this something that's being properly promoted to them? The other thing to think about with pensions is if you're looking at a means of providing an additional benefit to employees which puts more money their way but without necessarily increasing the cost of you as the employer of doing that then an increase in the rate of employer contribution can also be quite an attractive option there.”

Joe Glavina: “It sounds from what you’re saying that this mainly concerns salary sacrifice?”

Chris Thomas: “I think it does in a sense, but I think the particular point that I'm making is in relation to salary sacrifice because that is where the employee has got an element of choice, if you like. So when we talk about salary sacrifice it doesn't just work with pension contributions, there are also various other benefits you can provide in a tax efficient way through salary sacrifice. So that might be cycle-to-work which has been around for ages but, again, is another good scheme that combines tax advantages with wider environmental benefits for example. There’s childcare provision, there's electric cars which is the new one that we're seeing with increasing amounts of companies interested in that because that's a very attractive tax regime in terms of the amount of benefit-in-kind tax that the employee pays on a car being made available to them. So, yes, it is about salary sacrifice but, equally, some of these things are things that could be provided as standalone benefits. So, not just necessarily in return for the employee giving up part of their existing salary, but if you're looking at putting together a sort of remuneration packages for new joiners, for example, it could be something that is offered as a benefit in and of itself. For example, the point I made about employer pension contributions, it could be as simple as just increasing the rate of employer pension contribution by 1%, which is a very tax efficient thing for the employer to do but gets a significant benefit to the employee.”

Joe Glavina: “Is there anything else employers can be looking at Chris that might save on tax?”

Chris Thomas: “Yes, there are a couple of other areas, which are absolutely worth looking at and which we are seeing interest in from clients. So, one of those is the potential use of healthcare trusts as an alternative to private medical insurance cover. Now, again, these have been around for a number of years but we are seeing increased interest in them in more recent times. One of the reasons for that, I think, is that amongst other advantages there is a potentially quite significant insurance premium tax saving of about 12% on the money that you'd otherwise be spending on insurance premium. The way that works is it's effectively a sort of form of self-insurance, I suppose, so it’s going to be more suitable for companies with larger number of employees say, you know, maybe about 500 plus. From the employees’ perspective it looks very similar, in terms of benefits they are getting to a private medical insurance policy but it's just a different way of providing it in conjunction with the main providers that our audience will be familiar with, you know, your AXAs and BUPAs and such like. So it can provide a very similar benefit but, as I said, in a more tax efficient way. So, again, if you're looking at how can we deliver  our benefits package that we know our employees want but in a way that perhaps reduces the cost of doing that, that's another way in which you potentially could achieve that. Then the final thing just to mention which is an absolutely critical part of any tax efficient remuneration package is share of incentives. There’s all sorts of reasons why businesses might want to offer share incentives. It's not just about tax, it’s also about employee engagements and having an attractive remuneration package generally, but tax can be a significant driver because there are several quite tax efficient schemes which push value that would be subject to income tax and NICs into capital gains treatment which is a much lower rate and there are all sorts of different types of scheme available to suit the particular needs the business may have, and who they're looking to target through that. So again, that's something that has been around for a long time but in the current environment we are seeing quite a lot of people we're looking at what they could put in place or, potentially, if they've already got something, how they might improve on that.”

The 1.25% rise is a big issue for employers and there is a particular issue that end users should be alive to which is who in the supply chain should bear that extra cost. A couple of weeks ago Emma Johnston talked to this programme about that and why it’s important for end users should check their supply contracts. That programme is called ‘Review supply chains before new 1.25% levy’ as is available now for viewing from the Outlaw website.