How to use salary sacrifice to offset the upcoming rise in employers’ National Insurance costs
With the impending rise in National Insurance contributions (NICs), many employers are looking to salary sacrifice to make NIC savings and reduce overall contributions.
The Autumn Budget announced several changes for employers, many of which are due to come into force in April 2025. By far the most significant of these is the increase to employers’ National Insurance contributions (NIC), which for many employers is set to make the cost of employment much more expensive.
From 6 April, the rate of Class 1 Employers NIC will increase by 1.2%, from the current rate of 13.8% to 15%. In addition, the threshold at which employers become liable to pay NIC will reduce from £9,100 to £5,000. The change in this threshold alone will cost £615 per employee, according to Royal London.
The employers’ NIC increase will also apply to Class 1A and Class 1B NIC paid by employers on benefits in kind reported on P11Ds (or payrolled benefits) and via a PAYE Settlement Agreement.
On top of all this, from 1 April, workers who are aged 21 or over will be entitled to the new minimum national living wage of £12.21 per hour instead of £11.44, a 6.7% increase.
What can employers do about the increase?
To help mitigate the uplift in NIC from April, research data revealed in SME Magazine suggests that a third of businesses are planning to implement price increases, whilst four in ten are planning to introduce staff benefits to avoid higher wage bills.
Certainly one effective option for employers would be to maximise their pension contributions via salary sacrifice to make NIC savings and reduce overall contributions. The recent Pensions Age article suggests that “huge savings” could be made for employers who decide to put a salary sacrifice scheme in place, or encourage staff to maximise their pension contributions.
For employers who already have a salary sacrifice scheme, they should review whether participation is as high as it could be and to assess whether employees are aware of the maximum contribution levels.
If your salary sacrifice scheme is on an ‘opt in’ basis, you should consider a switch to automatic enrolment for new joiners. You should also look to communicate the benefits of salary sacrifice to existing employees who aren’t taking advantage of the scheme.
For employers, salary sacrifice pensions replace an employee’s earnings (which would otherwise be subject to employers’ NIC), with a NIC-free benefit – saving employers 15% (from April 2025) of the amount sacrificed.
For employees, salary sacrifice schemes mean they pay less income tax and NIC, whilst they boost their pension contributions. Some employers may also share some or all of the employers’ NIC saving with employees, meaning enhanced contributions for the employee.
In addition to pensions, it is possible and tax-efficient to provide other benefits such as ultra-low emission vehicles (ULEVs) and a cycle to work scheme to employees under salary sacrifice. Whilst the potential savings are likely to be much smaller, there are wider advantages including ESG benefits.
Summary
The upcoming NIC increases are likely to lead to a significant increase in costs for employers, but it may be possible to mitigate this by a properly implemented salary sacrifice pension scheme.
If you would like to find out how to introduce or enhance a salary sacrifice scheme for your business, contact us today.