National insurance contributions when doing salary sacrifice

[Peterpetrole]

Following on from a couple of other pension queries PHers have helped me with recently, how does salary sacrifice affect counting NI contributions?

I understand you need 35 qualifying years of paying NI to be eligible for a full state pension. But if I salary sacrifice almost all of my salary into my pension for the next few years am I still paying NI and racking up qualifying years?

Or do I need to make sure I'm still taking home minimum wage?

[BAMoFo]

For the curent tax year, as long as your remaining salary (taxable income) after salary sacrifice is above £125 per week / £542 per month / £6,500 per year, you will be classed as having paid sufficient NI for the year. The figures quoted are known as the Lower Earnings Limit and more information can be found here https://www.gov.uk/guidance/rates-and-thresholds-f...

I wish my employer would allow more than the current 7% maximum pension contribution via Salary Sacrifice. It would save a substantial amount of NI contributions because I've been paying 100% of my remaining salary as Additional Voluntary Contributions for the last 3 years. As such, NI is still payable but I do get the tax saving.

[Peterpetrole]

BAMoFo said:

For the curent tax year, as long as your remaining salary (taxable income) after salary sacrifice is above £125 per week / £542 per month / £6,500 per year, you will be classed as having paid sufficient NI for the year. The figures quoted are known as the Lower Earnings Limit and more information can be found here https://www.gov.uk/guidance/rates-and-thresholds-f...

I wish my employer would allow more than the current 7% maximum pension contribution via Salary Sacrifice. It would save a substantial amount of NI contributions because I've been paying 100% of my remaining salary as Additional Voluntary Contributions for the last 3 years. As such, NI is still payable but I do get the tax saving.

That's great very helpful thanks

[WhiskyDisco]

Peterpetrole said:

Following on from a couple of other pension queries PHers have helped me with recently, how does salary sacrifice affect counting NI contributions?

I understand you need 35 qualifying years of paying NI to be eligible for a full state pension. But if I salary sacrifice almost all of my salary into my pension for the next few years am I still paying NI and racking up qualifying years?

Or do I need to make sure I'm still taking home minimum wage?

When I was really pushing SS my employer said that I needed to earn minimum wage. The post above suggests minimum NI but it wasn't the case for me.

[Mogul]

On the minimum wage question, there do appear to some rules in play (see ChatGPT references below).

However, like most things with Self-Assessment, there aren't many guardrails so you-might-be-fine, but if you get caught on the wrong side of an assessment, there could be consequences...

ChatGPT said...

In the UK, salary exchange (or salary sacrifice) arrangements must comply with National Minimum Wage (NMW) regulations. The rule that an employee cannot reduce their cash earnings below the NMW as a result of salary exchange is clearly set out in HMRC guidance and UK legislation.

? Where is it written?
1. HMRC Guidance Employment Income Manual (EIM42771)
HMRC's official guidance on salary sacrifice arrangements explains:

"The arrangement is ineffective for tax purposes if it reduces the employee s cash earnings below the National Minimum Wage."

See: HMRC EIM42771 Salary sacrifice: National Minimum Wage

2. National Minimum Wage Regulations 2015
The legislation itself Regulation 10 of the National Minimum Wage Regulations 2015 specifies how pay must be calculated and prohibits arrangements that reduce it below the minimum:

An employer must not make any deduction or receive any payment from a worker that would reduce the worker s pay below the national minimum wage.

You can read the legislation here: The National Minimum Wage Regulations 2015 (legislation.gov.uk)

3. GOV.UK Guidance Salary sacrifice and the effects on payroll
From the GOV.UK site:

You cannot set up a salary sacrifice arrangement if it reduces an employee s cash earnings below the National Minimum Wage rates.

Source: Salary sacrifice and the effects on payroll GOV.UK

[The Ferret]

BAMoFo said:

I wish my employer would allow more than the current 7% maximum pension contribution via Salary Sacrifice. It would save a substantial amount of NI contributions because I've been paying 100% of my remaining salary as Additional Voluntary Contributions for the last 3 years. As such, NI is still payable but I do get the tax saving.

I really can't see why employers would refuse to. I push it heavily to all of our staff, and we allow them to literally do as much as they please (and we give them the NI saving too!)

Any employer not offering it is potentially costing themselves an extra 15% and frustrating the employee in the process. It's not difficult or complicated, and if they're already allowing 7% then the admin side is already happening.

[Peterpetrole]

The Ferret said:

I really can't see why employers would refuse to. I push it heavily to all of our staff, and we allow them to literally do as much as they please (and we give them the NI saving too!)

Any employer not offering it is potentially costing themselves an extra 15% and frustrating the employee in the process. It's not difficult or complicated, and if they're already allowing 7% then the admin side is already happening.

Which is great, but can I ask re the post above about hmrc, do any of your employees take themselves below minimum wage?

[Cats_pyjamas]

I looked into Ni contributions last week as the wife is dropping to part time. You have to earn a minimum of something like £250/week for full no credits. (The actual amount is detailed on the HMRC site).

If paying into your salary sacrifice, you cannot legally drop below minimum wage when all salary sacrifice items are taken into account (say if you buy leave/c2w/company share scheme ectect).

[POIDH]

Cats_pyjamas said:

If paying into your salary sacrifice, you cannot legally drop below minimum wage when all salary sacrifice items are taken into account (say if you buy leave/c2w/company share scheme ectect).

That. ^
Son who earns a very modest wage with pension has been stopped by employer (national supermarket) from falling below NMW.

[BAMoFo]

The Ferret said:

I really can't see why employers would refuse to. I push it heavily to all of our staff, and we allow them to literally do as much as they please (and we give them the NI saving too!)

Any employer not offering it is potentially costing themselves an extra 15% and frustrating the employee in the process. It's not difficult or complicated, and if they're already allowing 7% then the admin side is already happening.

I currently work part time for BAES Systems and they will not pay more than 7% as Salary Sacrifice. I agree that they would benefit from allowing more, but they probably don't want to rock the boat too much with the government because a lot of their revenue comes from government contracts. I could be wrong but that is my guess.

[BAMoFo]

WhiskyDisco said:

When I was really pushing SS my employer said that I needed to earn minimum wage. The post above suggests minimum NI but it wasn't the case for me.

Yes, you are correct regarding needing to earn above National Minimum Wage (NMW). I was only responding to the impact on qualifying for State Pension. Incidentally, it seems strange that National Minimum Wage doesn't come into it for Additional Voluntary Contributions.