Farmers can soften the impact of April’s hike in National Insurance through salary sacrifice pensions, financial experts have said.
The government is planning to increase National Insurance from 13.8% to 15.05% for employers and 12% to 13.25% for employees on 6 April.
According to pension experts at NFU Mutual, 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 owner benefits as they don’t pay employer national insurance on the amount paid into the employee’s pension, while the employee benefits as they don’t pay income tax or national insurance on the benefit.
NFU Mutual provides an example of a basic rate taxpayer on £30,000 in 2022/23. For 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: “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.”