Purpose

When administering Flexible Benefits for Great Britain (GB FlexBens), your organisation may not wish to incur additional employer National Insurance Contributions (NICs) costs as a result of the benefits choices your employees make. Therefore, you can apply the NI Cost Neutralityprinciple in GB FlexBens so that the overall cost to your business is unaffected by your employees’ benefits choices.

You apply the NI Cost Neutrality principle to one or more benefit areas. Therefore, you can set NI Neutrality for some employees and not for others, depending on your organisational requirements.

The principle of NI Cost Neutrality applies mainly to the No Additional Funding Flexible Benefits scheme. This scheme is the simplest type of Flexible Benefits scheme. You implement this scheme when you wish to give your employees a degree of flexibility in their choice of benefits.

When applying NI Cost Neutrality, it is important to distinguish between core and standard benefits as No Additional Funding Schemes can involve the provision of both these types of benefits. Core benefitsare automatically provided by you and are fixed, whereas you offer standard benefitswith a default level which can be modified by your employees during benefits enrolment. In the latter case, if an employee changes the standard benefits offered by you, these changes may affect your employer NICs amount.

Therefore, it is only the standard benefits changed by the employee during enrolment that are relevant for NI neutrality processing.

Implementation Considerations

When you apply the NI cost neutrality principle to a benefits plan in a No Additional Funding Scheme in GB FlexBens, the employer NIC costs or savings that result from an employee’s changes to the standard benefit package are taken into account when calculating the costs to the employee of his or her individual benefits choices.

If you do not wish to incur additional/reduced employer NIC costs due to the benefits choices made by your employees, apply the NI Cost neutrality principle.

In this situation, the employee will pay for any additional employer NICs produced as a result of any changes they make to the standard benefits offered to them by you during enrolment . Conversely, employees will receive a refund if employer NICs are reduced as a result of their benefits choices.

Example

A generalised example to illustrate the basic principles involved in applying the NI Cost Neutrality principle in GB FlexBens is given below:

You have applied NI Cost Neutrality to the holiday buying/selling plan, in which a female employee earning a annual basic salary of GBP20,000 has enroled. Two scenarios are illustrated below, one involving the employee selling two days holiday and the other involving her buying two days.

You have calculated the value of two days holiday as GBP153.85 (20,000/260x2, where 260 represents the number of annual working days).

Scenario 1: Selling Two DaysHoliday

The employee sells two days holiday and is therefore entitled to receive a refund into her salary equivalent to the value of the two days she sells back to you as the employer. Her salary is therefore increased, resulting in an increase in employer’s NICs for your organisation. In this scenario, employer NICs are calculated at 11% of the employee’s NIable salary.

If NI cost neutrality is not applied, the full value of these two days (GBP153.85) is added to the employee’s salary. However, due to this increase in salary, employer NICs also have increased. You do not wish to pay these additional NICs and therefore apply NI Cost Neutrality to this particular GB FlexBens plan.

Therefore, you calculate the additional employer NICs produced by the employee selling two days holiday, and reduce the amount paid to her by the value of the additional employer NICs generated.

You calculate the actual value added to her salary as a result of her selling two days holiday as follows:

Therefore, GBP 138.60 is the amount paid to the employee for selling two days holiday.

Scenario 2: Buying Two DaysHoliday

The employee buys two days holiday and would normally be deducted GBP153.85 from her salary to pay for these extra two days. This reduction in salary therefore results in a decrease in employer NICs for the organisation, again calculated at 11%.

If NI cost neutrality is not applied, the full value of these two days, GBP153.85, is deducted from the employee’s salary. However, due to this reduction in salary, employer NICs will also decrease. You wish to pass on these savings in employer NICs to the employee, and apply NI Cost Neutrality to this particular GB FlexBens plan.

Therefore, you calculate the reduction in employer NICs produced by the employee buying two days holiday, and decrease the amount deducted from her salary by the value of the reduced employer NICs generated.

You calculate the actual value deducted from her salary as a result of her selling two days holiday as follows:

Therefore, GBP 138.60 is the amount deducted from the employee’s salary for buying two extra days holiday.

For further examples of NI Cost Neutrality, see also: NI Neutrality Scenarios in GB Flexible Benefits