Using Salary Sacrifice to Offset the increase in Employers’ National Insurance Contributions

Using Salary Sacrifice to Offset the increase in Employers’ National Insurance Contributions

As employers prepare for the significant increase in Employers' National Insurance Contributions (NIC) scheduled for April 6, 2025, it is vital to explore effective strategies to manage these rising costs. At Ward Williams, we understand the importance of proactive financial planning and wish to highlight the potential benefits of salary sacrifice pension arrangements as a viable solution.

Understanding the Changes

From April 2025, the rate of Class 1 Employers' NIC will rise by 1.2%, bringing it to 15%. Additionally, the threshold for paying these contributions will decrease from £9,100 to £5,000, resulting in an estimated additional cost of £615 per employee. This adjustment will also impact Class 1A and Class 1B NIC on benefits in kind.

The Role of Salary Sacrifice

Salary sacrifice pension arrangements allow employees to exchange a portion of their salary for increased employer pension contributions. This arrangement not only enhances pension savings but also leads to significant NIC and tax savings for both employees and employers. Here’s how it works:

• Employee Benefits: By participating in a salary sacrifice scheme, employees can lower their taxable income, resulting in reduced income tax and NIC, whilst simultaneously increasing their pension contributions.
• Employer Savings: Employers benefit from decreased NIC since contributions are made from a reduced salary base. Implementing a salary sacrifice scheme can save employers approximately 15% on the amount sacrificed.

A Practical Example

Consider an employer with 100 employees earning an average salary of £50,000. Without any salary sacrifice arrangements, the employer could face an additional £110,000 in NIC costs due to the upcoming changes. However, by introducing a salary sacrifice scheme with an average contribution rate of 6%, this cost could be reduced by approximately £55,000, resulting in total savings of around £45,000 annually.

Additional Advantages

• Retention Tool: Employers can choose to share NIC savings with employees by increasing their pension contributions, which can help attract and retain top talent.
• Flexibility for Employees: Employees may opt to waive bonuses in favour of increased pension contributions, providing more options for saving towards retirement.

Points to Consider Before Implementation

National Minimum Wage (NMW): Salary sacrifice arrangements reduce pay for NMW purposes, which may require employers to exclude certain lower-paid employees. It is essential to implement appropriate checks to ensure that no workers are inadvertently paid below the NMW, thereby safeguarding compliance and promoting a fair workplace culture.

Effective Implementation: Proper implementation of salary sacrifice arrangements is crucial. Employees must clearly relinquish their right to earnings before they become entitled to those earnings. We recommend seeking professional advice to ensure that any salary sacrifice scheme is introduced or enhanced effectively, thereby maximising benefits for both the employer and employees.

Employee Income Levels: Salary sacrifice reduces an employee’s earnings, which could impact their ability to secure loans, such as mortgages. This potential effect should be communicated transparently to employees from the outset, fostering trust and ensuring they make informed decisions about their participation in the scheme.

Salary-Based Benefits: Some employee benefits may be contingent on income levels, which could be affected by reducing pay through salary sacrifice. Employers should evaluate how these changes might impact overall employee benefits and consider adjustments that maintain a competitive advantage in attracting and retaining talent.

Other Measures

Ultra-Low Emission Vehicles (ULEVs) and Cycle-to-Work Schemes: Beyond pensions, offering ULEVs and cycle-to-work schemes under salary sacrifice can provide tax-efficient benefits while promoting environmental sustainability (ESG). This not only enhances employee satisfaction but also aligns with corporate social responsibility goals, improving company culture and public perception.

NIC Categories: Certain employees, such as apprentices under 25, are not subject to Employers’ NIC unless they earn over £50,270. Reviewing NIC categories can ensure that employees are treated correctly for NIC purposes while potentially reducing costs. This strategic review can enhance workforce morale by demonstrating a commitment to fairness and transparency.

Value for Money Assessment: As the NIC increase will also apply to Class 1A NIC on benefits in kind, now is an opportune time for employers to evaluate whether they are receiving value for money from existing benefit providers. Identifying cost savings can free up resources for investment in employee development and retention initiatives, reinforcing a positive workplace culture.

Simon Boxall, Tax Director for Ward Williams states “The increase in NIC rates and the reduction in thresholds present significant challenges for employers. However, a well-structured salary sacrifice scheme offers a strategic way to mitigate these costs while enhancing employee benefits.”

 For more information on how to implement these strategies effectively or to discuss your specific circumstances, please contact us at 01932 830664 or email us at enquiries@wardwilliams.co.uk.