Compensation Reduction Schemes for Upcoming Increase in National Insurance

Compensation Reduction Schemes for Upcoming Increase in National Insurance

 

Compensation Reduction Schemes for Upcoming Increase in National Insurance

 

We have just passed the April 6th deadline for this year’s increase in insurance contributions. While Chancellor of the Exchequer Rishi Sunak is still following through on his idea of a 1.25% increase, there is still some time to combat this rise. By utilising compensation reduction schemes, an individual can offset this increase by reducing their overall tax bill. 

 

A compensation reduction scheme allows for employers to give you benefits equal to the salary that the employee forfeits. There are many different examples of these benefits, such as pension contributions, childcare support, and cycle-to-work programmes. The idea is that these benefits are not taxable, and so by utilising these and by lowering the amount of your taxable compensation, an individual will be able to pay a lower income tax bill. This realisation is important because the contributions for national insurance are continuing to increase. If an individual earns 50,000 pounds a year, the national insurance increase will cause the tax bill for the year to increase by 200 pounds. If a compensation reduction scheme is used instead, such as increasing contributions to a pension by 100 pounds each month, the individual would be able to wipe out 160 of the 200 pounds increase without reducing the total value of all of the benefits received from the employer. 

 

It is important to note that these compensation reduction schemes are not offered by all employers. Some employers still implement the traditional method of contributions rather than through a salary forfeiture. It is important to realise what your employer offers for its benefits. 

 

If a compensation reduction scheme is available from your employer, there is a good incentive to lower the tax bill. Rishi Sunak had previously announced that the income tax brackets would remain constant until 2024. If an individual’s salary continues to increase with these fixed brackets, there is a chance that the individual will move into a higher income tax bracket, thereby paying more income tax. With the utilisation of compensation reduction schemes, an individual could avoid these higher income tax brackets, allowing them to pay tax at a lower tax rate.  

 

While there are many appealing options for compensation reduction schemes, it is important to consider the other additional factors of lowering your salary. For example, life insurance is typically based off the amount of your salary. By lowering the amount of the salary, the amount of life insurance received will also decrease. Furthermore, lenders often use salary metrics to determine how much money they will give an individual. By reducing the amount of salary, lenders will be more hesitant to loan money to use.  

 

Despite these issues, it is still important to weigh the pros and cons and evaluate whether the compensation reduction scheme make the most sense financially. If your employer provides compensation reduction schemes, ask for a detailed breakdown of how it will affect both your salary and your amount paid for income taxes. From there, an individual can evaluate what is in their best financial interests. Employers want to utilise these compensation reduction schemes, as it helps them reduce costs of doing their business, so if it is available, it is an important option to consider.