One of the least popular changes from the latest Budget is the increase in employers’ National Insurance contributions (NICs) from 13.8% to 15%, effective from 6 April 2025. This rise also applies to Class 1A and Class 1B NICs, making it even more expensive for businesses to provide taxable benefits or settle an employee’s tax liability through a PAYE Settlement Agreement (PSA).
So, what can you do to manage these rising costs? One option to consider is salary sacrifice.
How Salary Sacrifice Can Help
Salary sacrifice schemes have been around for a while, but in 2017, changes to tax rules meant that many of the benefits were stripped away. However, there are still some exceptions – most notably, pension contributions. If structured correctly, salary sacrifice can still save both you and your employees money on NICs.
Here’s an example:
Let’s say an employee wants to contribute an extra £500 per month into their pension. Normally, that contribution would come out of their take-home pay, meaning they’d still pay NICs on their full gross salary before the deduction.
For the employee, this means paying:
- £40 per month in NICs (if earning between the primary threshold and the upper earnings limit).
- £10 per month in NICs (if earning above the upper earnings limit).
For the employer, the cost is even higher:
- £69 per month in employer NICs in 2024/25.
- Rising to £75 per month from 2025/26.
But with a salary sacrifice arrangement, the employee gives up £500 of their salary in exchange for the employer making a £500 pension contribution on their behalf. This reduces their gross taxable salary, resulting in NIC savings for both the employee and the employer.
The benefits?
The employee still gets £500 into their pension but pays less NICs (saving between £10 and £40 per month).
The employer saves NICs – in 2025/26, this would amount to £900 per year per employee contributing £500 per month.
And the good news? This strategy isn’t just limited to pensions. Salary sacrifice can also be used for tax-free benefits such as employer-provided bikes and cycling safety equipment.
A Word of Caution
Before jumping in, it’s important to get salary sacrifice arrangements right. To be valid:
- The employee’s contract must be updated to reflect their reduced salary.
- The employee must not be able to switch back to their original pay whenever they like.
If done properly, salary sacrifice is a great way to help employees save for the future while reducing your National Insurance costs.
Want to Know More?
Salary sacrifice isn’t right for every business, but it could be a smart way to offset rising NICs. If you’d like to explore how it could work for you, get in touch with Jon and the team today. We’ll help you find the best tax-efficient solutions for your business!
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Any questions?
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