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The impact of NI contribution changes on employee benefits and financial wellbeing

The impact of NI contribution changes on employee benefits and financial wellbeing

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As we reported in our FYI Alert in October, the rates of National Insurance Contributions (NICs) will increase by 1.25% in 2022/23, as a precursor to the introduction of the new Health & Social Care Levy from 2023/24. The primary impact will be an increased cost for both employers and employees, though there are also considerations for your employee benefits, along with your employees’ financial wellbeing. How can employers best mitigate these rising costs, for their organisations and staff?

Workplace pensions
The increase in NICs mean that saving into your workplace pension via salary sacrifice will be even more tax efficient than before, which presents an opportunity to re-engage your employees regarding saving for retirement.

Employer NICs are also increasing, and therefore so too will the saving this generates via salary sacrifice. If you currently share this in full or in part with your employees, consideration should be given to whether any of the increased NICs saving will also be shared from April.

Alternatively, if you use the employer’s saving in NICs as a budget for your reward strategy and communications, you should recalculate the saving from 2022/23 to reset the budget.

If you offer cash allowances or pension re-direct to employees impacted by the Annual and Lifetime Allowances, and this is offset by employer NICs, the allowance/re-direct should be recalculated from April and communicated to the impacted employees.

Risk benefits
If you operate an income protection scheme which insures employer NICs, you may see an increased premium from the next renewal, to reflect the increased benefit insured. We are not expecting insurers to use this as a trigger for an immediate rate review, though this will be reflected in your next review.

In the case of existing claims, the expectation is that the insurer will continue to pay the claim based on the existing sum assured, to reflect employer NICs of 13.8%, and won’t increase the claim from April to reflect the increased NICs.  This results in a shortfall for the employer. New claims should however be based on the new rates.

Share plans
If you operate a share incentive plan (SIP) with partnership shares, then employee deductions will be even more efficient as they are from pre-tax salary. As an employer, you will also benefit from the additional savings in employer NICs. This creates good reason to revisit your existing SIP, and look for areas where you might increase participation and engagement. Or if you don’t already have one, it may be a good opportunity to consider implementing one.

For most other share awards, you need to ensure that at vest the new rates are being applied to both employee and employer NICs on any gains.

Benefits technology and communications
Any benefits technology that includes a calculation of the gross and net cost of benefits will need to be updated to reflect the new rates from April, as will any communication materials which refer to the rates of NICs.

Financial wellbeing
An increase in costs is never welcome, but coupled with inflation growing faster than wages and soaring energy prices, the additional increase in NICs will for many, create additional pressure on already stretched household budgets. For an employee with a salary of £30,000, for example, they will see increased costs from NICs alone of £18 a month from April.

With inflation running at over 5% plus increasing NICs, few employers are able to offer salary increases in excess of 6% to cover these additional costs.  So what else can employers do to help their people?

Assisting your people
Financial education is key to any financial wellbeing strategy, but it isn’t something you can buy; it’s about patterns of behaviour and having the confidence to make good decisions about money. Education on some of the basic financial skills is fundamental, and budgeting is a great place to start.

It is crucial that individuals have awareness of where their money goes every month. Are they still paying for things they no longer need? Could they shop around for better deals? This all sounds straightforward, but if nobody has shown you, why should you know how to do it – or even that you should be doing it? Employer-supported financial education can make a real difference in establishing greater awareness and better spending and saving habits, particularly at times when living costs are rising.

You can also remind your employees about benefits you provide which could save them money. Things like season ticket loans, offers and discounts for everyday spending and big ticket items. Whilst NICs will increase, so too will the savings available from your salary sacrifice benefits, which will make those benefits even more cost effective than before. It is vital that employees are aware of this opportunity to offset rising costs.

It is also even more important now to understand and utilise the support and resources available from your benefits providers, including your employee assistance plan.  This often offers support around financial, mental and physical wellbeing, including help with debt management and managing your money, together with free guidance from the Government’s MoneyHelper.

Empowering your people to make good financial decisions can help them to reduce costs and spend more effectively, to mitigate the impact of the cost of living increase and help build their financial resilience.