Helping Employers Navigate Rising NI Costs: The Role of Salary Sacrifice

This article was originally published by Investment Life & Pensions Moneyfacts Magazine and is shared here with their permission.

Chancellor Rachel Reeves announced in the October Budget 2024 that Employer National Insurance contributions would increase from 13.8% to 15% with effect from 6 April 2025. Additionally, the threshold for paying Employers’ National Insurance (NI) contributions would reduce from £9,100 to £5,000. This change alone resulted in an increase in Employer National Insurance contributions of £615 per employee per annum (£4,100 x 15% = £615). It’s important to remember that, as National Insurance is not a devolved tax, this increase applied to employers in Scotland as well.

However, this increase was offset by the Employment Allowance, which rose from £5,000 for employers with an NI bill less than £100,000, to £10,500. This allowance is available to all eligible employers from 6 April 2025, reducing their overall National Insurance bill.

Employer concerns and strategic responses

Royal London research¹ with employers post-the 2024 budget showed they were concerned about the increased employment costs, the impact on business growth, and the expectation of reduced profits. Employers indicated they may look to reduce direct employment costs, which could involve recruitment freezes or redundancies. Alongside this, they said reviewing where there may be opportunities for tax savings was important.

Employers also indicated that they may reduce their employer pension contributions, subject to them meeting their automatic enrolment (AE) minimum contribution requirements and stop any increase to their contribution. For employers using salary sacrifice, they suggested they may reduce the 100% redirection of National Insurance savings being added to their employees’ pensions pots. Reduced employer pension contributions would result in less going into an employee’s pension pot and less being available to invest in UK infrastructure via the pot. And, ultimately, a lower income when the employee takes their benefits.

Mitigating the impact with pension contributions

Employers do not pay National Insurance on their employees’ pension contributions. And if they use salary sacrifice, they have the option of passing this saving on to their employees, which would increase their employees’ pension pot and, in turn, may help with recruitment and retention. This may help shift the conversation with employees solely on headline salary to considering the total remuneration package.

This is especially true if some of the employer NI saving is used to provide employee benefits, whether that is additional pension contributions or some other form of benefit, such as group income or critical illness cover. Alternatively, employers could keep the savings for themselves or consider a combination, perhaps passing a percentage on to employees while retaining the remainder for themselves.

With salary sacrifice, there’s a contractual agreement to reduce an employee’s headline salary. This saves both employee and employer NI on the salary no longer paid to the employee. The employer then pays both their own and the employee’s pension contribution as an employer pension contribution.

 
The role of advisers

For advisers, there is an education piece for employers on their books explaining what’s happening to their NI contributions and how salary sacrifice can be used to mitigate their increase in NI costs.

And for any of their clients in salary sacrifice schemes who have targeted a certain level of income in retirement, their retirement plans will need to be revisited, and their contributions will need to increase if they wish to achieve the same level of income as they had planned. If they don’t, their income will be reduced. 

Case study

Let’s use a case study to bring the benefits of salary sacrifice to life.

For our example pension scheme, we’ll assume there are 100 employees in the scheme with an average salary of £35,000, and the pension contributions are 5% employee pension contribution (including 1% tax relief) and 3% employer contribution.  The pension contribution is based on total earnings so from pound one and not based on qualifying earnings.

We’ll focus on one individual employee, Sam, and his position pre & post salary sacrifice, then consider the employer’s position pre and post, and then at the overall position (see tables below).

Looking at Sam first, before salary sacrifice his headline salary is £35,000, he makes his own pension contribution £1,750 gross £1,400 net and he has a take home salary of £27,320.

After salary sacrifice, his headline salary is lower, he makes no pensions contribution as his employer now makes it all on his behalf, and his take home salary is still £27,320.

Although Sam’s take home salary hasn’t changed, we haven’t seen any real benefit to him thus far. To see this, we need to look at the employers’ position.

By the employer paying Sam less salary, Sam makes an NI saving and so does the employer. In our example, Sam is re-directing all his NI savings to his pensions, and the employer is re-directing half of their NI savings to Sam’s pension contribution and keeping the other half for themselves, which they’re quite entitled to do. The employer could keep all their NI savings or redirect all their savings and there are a few other options too.

Sam’s headline salary has gone down, but the employer’s pension contribution has gone from £1,050 per annum before salary exchange to £3,140 per annum after. This is because they still pay their £1,050 contribution, plus all of Sam’s contribution, plus all of Sam’s NI savings, plus half of their employer’s NI saving, all into Sam’s pension. Even with the additional pension contribution from the employer, the cost of employing Sam for the employer has reduced by £146 per annum.

Sam now has £3,140 per annum going into his pension, which is £340 extra each year, for the same take home pay he received when making a pension contribution without salary sacrifice.

This is a key point. It doesn’t make the pension contribution free. You just get more bang for your buck.

If the employer had 100 Sams in the scheme, that would mean a saving, every year, for the employer of £14,600 – not taking into account any wage increases, which would deliver an increased NI saving.

If Sam’s employer doesn’t redirect any savings, the saving is double. 
  
And, of course, we mustn’t forget about the Employment Allowance which will reduce the total NI bill by a further £10,500. 

Points to consider

It’s important to note that salary sacrifice won’t be right for all employees, and it isn’t possible to exchange salary below minimum wage or below the threshold for automatic enrolment. It’s also important to remember that an employee’s headline salary will be lower post-exchange, which could impact their ability to borrow, although employers could offset this by providing a certificate showing headline earnings before any salary exchange.

Employers should also speak with their payroll provider prior to deciding on a particular structure for the salary sacrifice arrangement to ensure the payroll system can facilitate that structure. As it’s a change of contract of employment, employers will likely need to take legal advice. This one-off cost may still be palatable given the ongoing benefits salary sacrifice can bring.

Conclusion

The employer National Insurance increase was and still is a concern for employers, and some have incurred additional costs as a result. However, with focused planning, it's possible for advisers to help mitigate some of this additional cost. By understanding the changes, exploring the benefits of salary sacrifice, and considering the expanded Employment Allowance, employers can navigate this transition more effectively and potentially turn a challenging situation into an opportunity for growth and retention. 

Sources:

¹ Royal London employer qualitative research conducted between 4 and 11 November 2024.