Following the Autumn Budget, businesses will bear the brunt of the biggest tax rise since 1993.
From 6 April 2025, the amount businesses will pay on their employees’ National Insurance contributions (NICs) will increase from 13.8% to 15%.
Rachel Reeves also announced that the current £9,100 threshold at which employers start paying National Insurance on employees’ earnings will reduce to £5,000.
The threshold will remain at £5,000 until 6 April 2028. Then it will continue to increase in line with the Consumer Prices Index (CPI) each year.
Offering employees a salary sacrifice scheme could help you to offset the increase
You can offer a range of benefits through a salary sacrifice scheme, including:
- A company car
- A cycle-to-work scheme
- Childcare vouchers
- Additional pension contributions.
In particular, additional pension contributions could make a significant difference to your employees in retirement.
However, according to research by Workplace Pensions Direct and YouGov, in 2023, only half of UK businesses use salary sacrifice for pension contributions[1].
Regardless of the employee benefits you apply, salary sacrifice could be a smart way to offset the effects of the impending NICs hike.
3 key benefits you and your staff could enjoy through a salary sacrifice scheme
- Employees pay lower Income Tax and National Insurance
Salary sacrifice (or “salary exchange”) allows staff to sacrifice a portion of their pay in exchange for a non-cash benefit.
While benefits range from childcare vouchers to gym memberships, we’d advocate that you use it to provide increased pension contributions.
Contributions are taken from employees’ salary, reducing their pay by an equal amount. In effect, this means employees pay less Income Tax and National Insurance.
- You and your employees enjoy National Insurance savings
Because salary sacrifice lowers the gross wage bill your business pays, this usually results in lower company NICs too. The more you pay out in wages, the higher your NI bill will be.
So, encouraging as many staff as possible – especially higher earners – to opt for salary sacrifice will help you to maximise savings.
- Less tax could lead to higher take-home pay, especially for high earners
Salary sacrifice can be a huge benefit to all of your staff, and high earners could find it particularly helpful.
Employees who are higher and additional-rate taxpayers can use salary sacrifice to great effect. That’s because they are able to reduce their Income Tax bill, while also contributing more towards their tax-efficient pension.
In fact, thanks to lower NICs and less Income Tax deducted, employees could find that their take-home pay rises.
Potential drawbacks not to be ignored
There may be potential downsides for some employees. For instance, a lower salary could affect an employee’s eligibility for means-tested benefits.
Plus, some state benefits, including the State Pension, are connected to salary. If using salary sacrifice takes your employees below the NICs threshold, this could prove problematic.
As ever, clear communication about the pros and cons of salary sacrifice will help your employees make the right decision for them.
Salary sacrifice summed up
If you don’t already have a salary sacrifice scheme in place, now could be a great time to change that.
With the upcoming NI increase looming, salary sacrifice is one way your business could better manage the increased costs while offering employees a tax-efficient way to get more from their workplace perks or grow their pensions.
Get in touch
To find out more about how a salary sacrifice scheme could benefit your business and employees, please get in touch.
Email info.wp@titanwh.com or call us on 0800 048 0150.
Please note
The information contained in this article is based on the opinion of Titan Wealth Planning and does not constitute financial advice or a recommendation for any investment or retirement strategy.
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.
[1] https://workplacepensionsdirect.co.uk/research-reveals-only-half-of-british-businesses-maximising-employees-pension-potential/
