In today’s competitive economic landscape, finding strategies that benefit both your bottom line and your employees’ wellbeing is key to a thriving business. You could now be particularly worried about cutting costs while keeping employees happy, considering the increase to employer National Insurance contributions (NICs) on 6 April 2025.
One powerful tool to consider is salary sacrifice.
Put simply, salary sacrifice is an arrangement where an employee agrees to give up a portion of their gross salary in exchange for a non-cash benefit provided by the employer.
This can have significant effects on both the business and the employee, as it can provide substantial savings for you, the employer, while simultaneously providing valuable tax benefits for your employees.
Here, read about the benefits of offering salary sacrifice as a business benefit and how to go about getting started.
A salary sacrifice scheme could help save your business and your employees money
One of the most compelling reasons for your business to offer a salary sacrifice scheme is the potential for employer National Insurance contribution (NIC) savings.
This is particularly important considering the new regulations regarding NICs, following the initial announcements in the 2024 Autumn Budget.
These are already in effect, so as of 6 April 2025:
- Most employers will have started paying employer National Insurance (NI) after the first £5,000 of an employee’s earnings, as opposed to £9,100. This is known as the secondary threshold.
- Employers with a total NI bill of £100,000 or less will benefit from a higher Employment Allowance (the amount that can be deducted from their NI bill) of £10,500, compared to the previous amount of £5,000.
- The employer NI rate increased from 13.8% to 15%.
These reforms mean a steep rise in payroll costs for some employers – even more so for those with large teams, whose NICs are likely to go above £100,000 and therefore not benefit from the Employment Allowance.
With salary sacrifice, you could reduce your NICs while supporting your employees’ financial wellbeing.
Because your employee’s salary is effectively reduced, you would both pay less in NICs, potentially saving you both money in the long run. There are two key benefits to this:
- Employers can offer improved benefits packages as a hiring incentive, attracting top talent.
- Employers can reinvest the money they save on NICs back into the business.
In fact, as reported in PensionsAge, for every £100,000 that your employees agree to sacrifice, your business could save up to £15,000 in employer NICs in the 2025/2026 tax year.
This is a substantial saving and could have a tangible impact on your business.
Offering salary sacrifice benefits your employees and could help attract top talent
While you, as the employer, would benefit from reduced NICs, salary sacrifice can also offer valuable tax efficiencies for your employees. By sacrificing a portion of their gross salary in exchange for a qualifying benefit, employees are essentially lowering their taxable income. This means they can save on both Income Tax and NI.
The tax-efficient nature of a scheme such as salary sacrifice can make it an attractive employee benefit. Indeed, it could play a crucial role in recruitment and retention.
In a competitive job market, offering benefits that translate to more money in an employee’s pocket could be what separates you from your competitors.
Moreover, the scope of benefits you can offer is broad. While many salary sacrifice options tend to focus on pension contributions, there are other compelling options. These could include:
- Cycle-to-work schemes
- Electric vehicle offers
- Childcare credits
- Technology purchasing schemes.
This flexibility means that you can tailor your benefits packages to match the diverse needs and preferences of your workforce.
It’s important to consider the technical aspects of providing salary sacrifice, plus drawbacks for employees
While the benefits of salary sacrifice are clear, successfully putting these schemes into place requires careful planning and attention to detail. You may need to make several important considerations for a smooth and compliant rollout.
- First, ensure that the benefits will appeal to your employees and align with your business goals.
- Second, you will need to amend employee contracts to include salary sacrifice as a benefit. These changes must be clearly outlined, showing the reduction in gross salary and the corresponding benefit it provides.
- Employees will need to be made fully aware of the drawbacks of salary sacrifice, including lower eligibility for borrowing and the impact on some state benefits.
- Finally, be sure that your payroll system can handle mixed arrangements, as some employees may choose to sacrifice more or less than others.
You will also need to ensure that your salary sacrifice schemes comply with all relevant legislation and tax rules. This includes adhering to minimum wage rules and ensuring that the arrangements don’t negatively affect your employees’ statutory entitlements.
That’s why clear and transparent communication is so important. Not only will this help you stay compliant, but it will help your employees understand how salary sacrifice works, the benefits available to them, and where their sacrificed funds are being directed.
Talk to a financial adviser for expert support
Don’t leave potential savings on the table this tax year. Implementing salary sacrifice can be a powerful way to reduce your NICs and help your business keep more of its hard-earned money.
We can help you plan how to implement a salary sacrifice scheme tailored to your business needs. We can also help you plan how to best use the resulting NICs savings for further growth.
Get in touch with us today to discuss your options.
Email us at [email protected], or call 01273 076 587.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
All information is correct at the time of writing and is subject to change in the future.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
A pension is a long-term investment not normally accessible until 55 (57 from April 2028). The fund value may fluctuate and can go down, which would have an impact on the level of pension benefits available. Past performance is not a reliable indicator of future performance.
The tax implications of pension withdrawals will be based on your individual circumstances. Thresholds, percentage rates, and tax legislation may change in subsequent Finance Acts.
Workplace pensions are regulated by The Pension Regulator.
The Financial Conduct Authority does not regulate tax planning.
