Farms can reduce the impact of April’s hike in National Insurance through salary sacrifice pensions, explain pension experts at NFU Mutual.

The government are planning to increase of National Insurance from 13.8% to 15.05% for employers and 12% to 13.25% for employees on April 6.

Salary sacrifice enables employees to give up part of their future salary (cash) in exchange for an employer pension contribution (non-cash benefit).

The farm business owner benefits as they don’t pay employer national insurance on the amount paid into the employee’s pension.

The employee benefits as they don’t pay income tax or national insurance on the benefit.   

Example of a basic rate taxpayer on £30,000 in 2022/23

No salary sacrifice: An employer must spend £1,177 to pay their employee £1,000 as they pay 15.05% (£177) in employer’s national insurance. The employee then pays 20% tax and 13.25% NICs on the £1,000 (£332.50), reducing what they take home to £667.50.

With salary sacrifice: If an employee earning £30,000 ‘sacrificed’ £1,000 of their salary in return for a £1,000 employer pension contribution, this would save the employer £177 in national insurance. The employee would benefit from an extra £1,000 in their pension at a cost to them of £667.50.

Martin Ansell, pension expert at NFU Mutual, said: “Boris Johnson and Rishi Sunak seem intent to go ahead with the planned hike in National Insurance this April.

“One way to reduce the impact of this tax hike on farm businesses is to set up a salary sacrifice pension scheme or pay more into one already available.

“Both farm business owners using salary sacrifice pension schemes and their employees will make bigger savings from April.

“Employees will not pay income tax or NICs on the pension contributions and have the potential to benefit from long-term growth in their pension.

"Following the introduction of automatic enrolment in 2012, all employees must be offered a workplace pension, but some may have opted out.

“Some pensions will not be salary sacrifice schemes, so it’s worth checking with your provider or taking advice.”

Salary sacrifice checklist

For employers

• Check the employment contract allows payment in a non-cash benefit and make sure employees agree to be partly paid this way before changing any payments
• Make sure the salary sacrifice arrangement does not reduce any employee’s cash earnings below the national minimum wage
• Report the non-cash benefit to HMRC at the end of the tax year

For employees

• Having a lower salary can mean lower borrowing available on mortgages where it is determined by a multiple of salary
• Employees should note that some state benefits can be affected by a salary sacrifice arrangement