With the increase in employers’ national insurance from April 2025, employers have some options to mitigate the rise using pensions salary sacrifice

From 6 April 2025, the rate of Class 1 Employers national insurance contributions (NIC) will increase by 1.2% to 15%. In addition, the threshold at which employers start to pay employers’ NIC on earnings will decrease from £9,100 to £5,000. The change in this threshold alone will cost £615 per employee.

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.

 

What can employers do about the increase?

 

In the build up to the Budget, it was mooted that the government would seek to introduce an employers’ NIC charge on employer pension contributions which would have largely removed the benefit of salary sacrifice pension schemes.

Ultimately, employer pension contributions were untouched, and salary sacrifice for pension contributions remains an efficient method of funding a pension scheme, for both employees and employers.

Under a salary sacrifice pension scheme, employees agree to give up a right to a portion of their salary in return for an employer pension contribution which is made direct to the pension scheme provider. When properly implemented, salary sacrifice pension contributions will result in a NIC saving for both the employee and, more so, the employer.

For employers that already have a salary sacrifice pension scheme in place, consideration should be given to whether or not participation is as high as it could be (for example, employers might assess whether employees are aware of the maximum contribution levels).

 

Benefits of salary sacrifice

  • Employees’ NIC saving – employee pension contributions are already tax efficient and employees are able to get tax relief at their marginal rate. However, salary sacrifice pension schemes also allow employees to save on employees’ NIC.

 

  • Employers’ NIC – 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 example, an employer with 100 employees earning on average £50,000 will pay approximately £100,000 more employers’ NIC per year from April 2025, assuming no salary sacrifice. By introducing salary sacrifice pension arrangements at an average contribution rate of 6%, the additional costs would be reduced – resulting in a reduced increase of approximately £55,000, giving a £45,000 saving per year.

 

  • Retention tool – Some employers choose to share some or all of the employers’ NIC saving with employees, 50/50 is a common split, by increasing the employer contribution level. This is a helpful way to incentivise, retain and attract talent.

 

  • Flexibility for employees – It is also possible for employees to waive bonuses in lieu of an employer pension contribution. This gives employees more flexibility to save for retirement and potentially reduce the ultimate marginal rate of tax paid on that income. Also, as salary sacrifice reduces an employee’s taxable income, it may enable employees to remain below income tax thresholds.

 

Points to consider before implementing

 

  • NMW – salary sacrifice reduces pay for NMW purposes and employers may therefore need to exclude certain lower paid employees and ensure there are appropriate checks in place to ensure that workers are not inadvertently paid below NMW.
  • Effective implementation – salary sacrifice arrangements must be properly implemented and employees must have given up a right to earnings before they become entitled to those earnings. We always recommend taking appropriate advice before seeking to introduce or enhance a salary sacrifice pension scheme.
  • Employee income levels – as discussed, salary sacrifice reduces an employee’s earnings which in turn could impact their ability to borrow money from, say, a mortgage provider. This should be clearly communicated to employees from the outset.
  • Salary based benefits – some benefits may be based on income levels which may be affected as a result of reducing pay by salary sacrifice.

 

Other measures

 

  • ULEVs and cycles – in addition to pensions, it is possible and tax-efficient to provide 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.
  • NIC categories – some employees, such as apprentices under the age of 25, are not subject to employers’ NIC unless they earn over £50,270. It would therefore be opportune to review NIC categories to ensure that employees are being correctly treated for NIC purposes.
  • Value for money – as the NIC increase will also apply to Class 1A NIC paid on benefits in kind, now would be a good time to consider whether or not you are getting value for money from your existing benefit provider or whether cost savings are available.

 

Conclusion

 

The increased NIC rate coupled with the reduction in the secondary threshold is likely to result in a significant increase in costs for employers but it may be possible to mitigate the increase by a properly implemented salary sacrifice pension scheme.

Source www.croneri.co.uk all rights recognised.