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How to cut your national insurance bill

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·6-min read
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Top tips: How to cut your National Insurance bill
UK prime minister Boris Johnson announced a 1.25% increase in national insurance from April 2022 to address the funding crisis in the health and social care system. Photo: PA

Millions of UK workers are going to see a reduction in their take home pay next year following a tax hike by the government.

Prime minister Boris Johnson has announced a controversial plan to raise national insurance (NI) payments by 1.25%.

The move is designed to raise £36bn ($49.86bn) over the next three years, and will be used to plug gaps in health and social care funding — including a post-COVID boost for the NHS. The hike is set to kick in for both employers and employees from April 2022.

This means someone on a salary of £30,000 will pay an extra £255 in NI each year.

Johnson has also said that dividend rates are to go up by the same amount.

Many are angry at the Tories reneging on manifesto promises not to raise NI contributions, VAT or income tax in this parliament. Millions of working-age younger people are especially enraged, as they are likely to be hit disproportionately by changes to NI.

Read more: UK national insurance hike: What it means for your finances

That said, there are steps you can take to mitigate the effects. Here we look at ways you can cut your tax bill.

Use a salary sacrifice scheme

Paying into a pension is a great way to save on tax, as you get relief on any contributions you make.

You can specifically tackle your NI bill using a salary sacrifice scheme — if your employer has one.

Such schemes effectively cut your pay, and boost pension contributions by an equivalent amount.

Sarah Coles, personal finance analyst from Hargreaves Lansdown, said: “Because you don’t pay NI on pension contributions, the full value of the cut in salary goes into the scheme. This won’t leave you better off today, because you’ll get less in your pay packet, but it means you’ll be boosting your income in retirement — as opposed to forking out more to the taxman.”

Read more: UK scraps pension triple lock

However, as salary sacrifice means your income is lowered, it could affect other things. For example, if your employer offers life insurance as a multiple of salary, it will be based on the new, lower salary. If you want to apply for a mortgage, this could also affect how much you’re able to borrow.

Sacrifice some of your bonus

If you get a bonus, you can also talk to your employer to see whether they will allow you to sacrifice some of this bonus into your pension, too.

Coles said: “This can be particularly useful where a bonus pushes you over a threshold you hadn’t planned for, such as the higher-rate tax threshold, or into paying the high income child benefit tax charge. Sacrificing a chunk of salary could push you back under the threshold again.”

Watch: What is national insurance and do I have to pay it?

Check out cycle-to-work and other schemes

While the pension tends to be the biggest opportunity to cut your NI bill, there are a handful of other salary sacrifice schemes you can use to make savings. This includes cycle-to-work schemes, the purchase of ultra-low emissions cars, and employer-supported childcare.

Coles said: “If you’re already signed up to your employer’s childcare vouchers scheme, you can use salary sacrifice to take more of your reward through the vouchers — and save tax and NI. You need to have signed up before October 2018.”

Read more: UK businesses warn NI hike will hit hiring

Note, though, that if your employer directly funds a nursery, you can take advantage of the tax and NI saving, but if you signed up for tax-free childcare, the process works differently, so there’s no NI saving to be had.

Go self-employed

While those who are self-employed pay a lower rate of NI, this should not be the reason for choosing to work for yourself.

This is a huge lifestyle change, and you’ll be responsible for all sorts of things, such as the finances of the business, and covering your costs for any periods when you’re unable to work, or when invoices aren’t paid. So, if you are thinking of becoming self-employed, make sure it is the right decision for you.

Other steps you can take to prepare your finances for this change

There are several ways to make sure you’re in control of your finances when the eventual tax change happens:

Adjust your budget according to the new amount of NI

You need to establish how much extra will be deducted from your pay each month so you can budget accordingly.

Read more: Johnson announces £12bn tax increase to fund NHS and social care

Rachel Harte, head of financial planning at digital financial coaching app, Claro, said: “For someone earning £30,000 and paying an extra £255 each year, this may seem like a trivial amount when you break it down to £21.25 a month. That said, it should still be accounted for. The last 18 months have been difficult for many, and a small adjustment could have big implications for those already living beyond their means.”

Make sure your tax code is correct

New research from Intuit Quickbooks, the financial management software provider, shows a third of UK workers are not checking their payslips each month.

It’s important to check your payslip carefully, as this will give you a clearer picture of your finances, and ensure you aren’t on the wrong code, and paying more tax than you owe.

Check whether you are entitled to tax credits

You may be able to claim extra cash if you look after children, are a disabled worker or are on a lower income.

This can be vital to help you make ends meet.

Claim tax relief

Another way to make savings on your tax bills is by taking advantage of the tax relief options available to you.

Read more: What is stopping employers from introducing four-day weeks?

Here are a few examples:

  • Tax relief for working from home — if you’ve been told to work from home for even as little as a day during the pandemic, you may be able to claim tax relief for your job expenses up to £125 a year

  • Marriage allowance — if you or your partner earns less than £12,570, you may be able to save £252 a year by claiming the marriage allowance

  • Council tax refund — if you live on your own you qualify for a 25% discount. If you’re a full-time student, you can get a 100% discount

Watch: What is a credit rating and why does it matter?

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