Engineering an erratic salary to reduce NI bill?

A16XJD

I've been making some significant 'salary sacrifice' pension contributions to remain eligible for childcare schemes. Whilst asking my employer about how NI deductions are calculated they explained that these are calculated within each individual salary payment.

Based on the typical NI Tiers (0%, 12%, 2%) it seems like this is clearly exploitable.

Rather than making significant, consistent salary sacrifice payments each month, it appears that my NI deductions would be significantly lower if I: 

-focused all of these annual pension contributions (via salary sacrifice) into just a handful of months (in these months reducing the amount paid at 12%)

-made minimum pension contributions (to achieve all employer contribution) in all other months. (to maximise the amount of earnings at the 2% rate)

Any months with any bonus earned, and inevitably venturing into the 2% bracket, should fall into that second approach (min pension contributions)

-Has anyone done this?

-Is it legal to artificially engineer salary phasing in this way for this purpose?

-Are there any pitfalls to this I haven't considered?

Thanks

Grumpy_chap

NI contributions are per pay period and this takes into account the duration covered by the pay period.

There are restrictions on how frequently SS can be changed.  This is not the clearest of rules but it boils down in most cases to once per year or a major life event.  These restrictions would prevent the "flipflop" that appears to be suggested.

A16XJD said:

I've been making some significant 'salary sacrifice' pension contributions to remain eligible for childcare schemes. Whilst asking my employer about how NI deductions are calculated they explained that these are calculated within each individual salary payment.

Based on the typical NI Tiers (0%, 12%, 2%) it seems like this is clearly exploitable.

Rather than making significant, consistent salary sacrifice payments each month, it appears that my NI deductions would be significantly lower if I: 

-focused all of these annual pension contributions (via salary sacrifice) into just a handful of months (in these months reducing the amount paid at 12%)

-made minimum pension contributions (to achieve all employer contribution) in all other months. (to maximise the amount of earnings at the 2% rate)

Any months with any bonus earned, and inevitably venturing into the 2% bracket, should fall into that second approach (min pension contributions)

-Has anyone done this?

-Is it legal to artificially engineer salary phasing in this way for this purpose?

-Are there any pitfalls to this I haven't considered?

Thanks

Jeremy535897

It is an interesting question. I imagine that there will be practical objections from the employer, as it seems that you would be asking to sacrifice different amounts of salary quite often in a year. Salary sacrifice cannot reduce salary below the national minimum wage. A more practical way might be to reduce monthly salary quite significantly, and receive a one off bonus at the end of the tax year (to avoid paying too much tax earlier in the year). If you are a director, this will not work as national insurance for directors is calculated on an annual basis.

A16XJD

Thanks both,

Just to confirm on those points:

• My employer is able to change the salary sacrifice % amount every month & i've been making use of this to date
• The 'minimum wage' point is one that has been raised, so that effectively defines the 'maximum' i can salary sacrifice
• I'm not a director, just an employee so am not aware of any other applicable mechanisms besides the standard tiers

From my maths on this, with a mix of 'min pension' months & 'max pension' months, boosts my take home net pay by over 2% which seems very worthwhile. (obviously no different to tax paid as based on FY) 

Jeremy535897

Most people can't do this because they have regular monthly commitments, but if you can, and your employer is happy with it, go for it.

Grumpy_chap

A16XJD said:

• My employer is able to change the salary sacrifice % amount every month & i've been making use of this to date

That appears to directly contradict the official guidance:
As a general rule, if an employee swaps between cash earnings and a non-cash benefit whenever they like, any expected tax and National Insurance contributions advantages under a salary sacrifice arrangement will not apply
https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye#change-the-terms-of-a-salary-sacrifice-arrangement

It is also a lot of admin burden on the employer to process in such a flexible way.

I don't know who picks up the tab if SS was administered too freely and later found to be disallowed.

Jeremy535897

Grumpy_chap said:

A16XJD said:

• My employer is able to change the salary sacrifice % amount every month & i've been making use of this to date

That appears to directly contradict the official guidance:
As a general rule, if an employee swaps between cash earnings and a non-cash benefit whenever they like, any expected tax and National Insurance contributions advantages under a salary sacrifice arrangement will not apply
https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye#change-the-terms-of-a-salary-sacrifice-arrangement

It is also a lot of admin burden on the employer to process in such a flexible way.

I don't know who picks up the tab if SS was administered too freely and later found to be disallowed.

If you read further into this, and the link to EIM 42755, you will see that the general rule you quote (which is in section 69A ITEPA 2003) doesn't apply to employer contributions to a pension scheme.

Grumpy_chap

Jeremy535897 said:

Grumpy_chap said:

A16XJD said:

• My employer is able to change the salary sacrifice % amount every month & i've been making use of this to date

That appears to directly contradict the official guidance:
As a general rule, if an employee swaps between cash earnings and a non-cash benefit whenever they like, any expected tax and National Insurance contributions advantages under a salary sacrifice arrangement will not apply
https://www.gov.uk/guidance/salary-sacrifice-and-the-effects-on-paye#change-the-terms-of-a-salary-sacrifice-arrangement

It is also a lot of admin burden on the employer to process in such a flexible way.

I don't know who picks up the tab if SS was administered too freely and later found to be disallowed.

If you read further into this, and the link to EIM 42755, you will see that the general rule you quote (which is in section 69A ITEPA 2003) doesn't apply to employer contributions to a pension scheme.

Thank you.

My current employer trotts out the rules I linked as to why our SS pension cannot change regularly. 

Probably because they don't want the admin burden and know very few people will read further.

Jeremy535897

Now you can enlighten him. Whether or not he will be grateful is a separate matter...

There was a thread on here recently about this very issue putting people off EVs. The rule is disapplied in that case also (section 120A(3)(c) ITEPA 2003).

areader

A16XJD said:

Has anyone done this?

There is a blog post about this at https://lazyfidad.com/2021/11/19/tax-hack-how-to-save-ni-with-pension-contributions/

Is it legal to artificially engineer salary phasing in this way for this purpose?

It is completely legal tax mitigation in my opinion, but I am not a tax lawyer and this is not advice!

Are there any pitfalls to this I haven't considered?

Make sure you are paid the minimum wage, I'd guess your employer would probably have some checks and safeguards around this. Some employers might limit the total % of gross salary you are allowed to contribute to pension and benefits each month which could reduce the scope of this type of pension contribution sequencing.

A16XJD

If anyones interested, this ultimately seemed to work as intended,

The vast majority of my pension contributions i did in just a small number of months (to eat into the amount paid at higher NI rates) & then i ensured i kept pension contributions to a minimum in the months i recieved bonuses (where i would inevitably go into the 2%NI range).

It's all showing up on the gov site as a 'full NI year' even though it's taken over £1k off my NI bill paid vs prior years.

If you were allowed to go under NMW on a temporary basis (allowing it to be assessed over the whole tax year) you'd be able to hit this one a lot harder though. Shame