Some benefits might be affected by joining a salary sacrifice scheme. Entitlement to some state benefits is based on the amount of National Insurance contributions (NICs) you have paid, or are deemed to have paid – these are known as contribution-based benefits. Contribution-based benefits include Employment and Support Allowance, Jobseeker’s Allowance (JSA), and the State Pension.
Reducing cash pay through salary sacrifice can reduce the amount of earnings on which you pay NICs to below the Lower Earnings Limit (LEL). This, in effect, could mean that you are no longer making (or deemed to be making) NICs.
Even if your earnings remain above the LEL, you will be paying less in NICs and so may be reducing your entitlement to contribution-based benefits. For most employees, making lower NICs may not adversely affect their benefit entitlement, because:
- they may still be paying enough NICs to qualify for benefits anyway;
- their earnings may be between £113 and £157 a week (i.e. the Lower Earnings Limit (LEL) and the Primary Threshold for tax year 2017/18). In this case, they are deemed to be paying NICs and can still build up benefit rights, even though they are not actually paying NICs;
- they may already be earning below the LEL before the salary sacrifice; or
- if they only sacrifice salary for a short period, their contribution history will only be affected for that period, so the effect on their benefit entitlement will be minimal.