2nd September 2019
Impact of National Insurance in the 2019/20 tax year, by Caroline Castle
The 2018 Autumn Budget announced an increase in the amount that could be earned before tax is applied, known as the personal allowance.
From April 2019, it provides individuals with the opportunity of earning £12,500 before they are required to pay tax, an increase of 5.5%. However, the lower National Insurance (NI) threshold increased only by 2.5%. Moreover, the upper limit, where employees start to pay NI at the reduced 2% rate rather than the standard 12% has increased by 7.9%. This subjects a much larger proportion of a higher rate tax payers’ income to the 12% bracket.
The impact of both these changes is that employees are generating greater NI payments into the national coffers. Tax by another name!
This means that an individual earning £18,000 per annum will see themselves paying more in NI than tax.
Moreover, a higher rate taxpayer who has their standard £12,500 allowance reduced to reflect other earnings or benefits such as private medical insurance or a company car could have thousands of pounds impacted by both the 40% tax band and 12% NI leaving them only 48p from every pound they earn.
So, what can be done to alleviate some of this increased NI?
Salary exchange has been around for several years and has frequently been termed an obvious route to adopt when explained to both employers and employees alike.
When the process is used properly, it really can generate savings for both employers and employees; savings which can be harnessed as additional pension contributions or left in the employees take-home pay.
Higher rate taxpayers also need to be aware of an amount where a salary exchange can remove this effective 52% tax bracket on any income which falls into higher rate tax while still incurring the threshold NI rate of 12%. These may be the same individuals who can also utilise the salary exchange route to keep their earnings below £50,000 so that they can continue to receive child benefit.
Those with income over £100,000 need also be aware of the reduction in tax this route can deliver. Those earning over this limit may be impacted by double taxation, having their personal allowance reduced at the same time as they pay tax at 40%. For them the level of income which is particularly effective is that tranche of income which is subject to this treatment imposing an effective tax rate of 60%.
Whilst it might be considered an option that has been around for a long time, salary exchange, is even more relevant in the 2019/2020 tax year, given the changes in thresholds for the next twelve months.
Ascot Lloyd is experienced in supporting employers introduce efficient salary sacrifice schemes for workplace pension schemes.