With Employer National Insurance Contributions (NICs) due to rise in April 2025, many businesses are wondering how to handle the significant impact these changes will have when they’re introduced.
But what if there was a way to shield yourself against the full effect of these changes while providing real positive benefits for your team? Well, the good news is Salary Sacrifice Schemes offer exactly that! They’re already being discussed by some as a way to mitigate the burden of the NIC increase. But what actually is a salary sacrifice scheme? How does it work, and who can take advantage of it?
What is salary sacrifice?
It works when an employee agrees to give up part of their salary to put towards something that will benefit them. This can include things like pensions, childcare, annual leave, gym memberships, mobile phones, or even tech!
By sacrificing a portion of their salary for a benefit, they’re freeing part of their salary from income tax and NICs. This means the net taxable salary is not only reduced for the employee but also for the employer, making it a useful tool to combat some of the changes to NIC.
Benefits of Salary Sacrifice for employers
The major benefit for employers is the reduction to employer NIC contributions but what does this look like in a real-world example?
Calculating the impact of salary sacrifice on NICs for employers
Great Things Limited – Pension Example
Great Things Limited has a company of 100 employees who, for ease, earn £30,000 each.
They don’t currently offer Salary Sacrifice, so from April 2025 they can expect the following annual bill:
- Gross Salary Payments – £3,000,000
- Employer NI Contributions (at the new rate of 15%) – £375,000
- Employer Pension Contributions – £90,000
- Total cost to Great Things Limited would be – £3,465,000
However, let’s say all 100 people decided that they wanted to go through the salary sacrifice scheme and sacrifice £1,500 a year into their pension. How would that change things for Great Things Limited?
- Gross Salary Payments – £2,850,000 (minus the £150,000 that is being sacrificed)
- Employer NI Contributions – £352,500
- Employer Pension Contributions – £240,000
- Total cost to Great Things Limited after salary sacrifice would be – £3,442,500
That’s an overall saving of £22,500 across the whole team!
Together Group Limited – Cycle to work scheme example
While pensions are a common salary sacrifice, they’re not the only option where tax savings are available for the employer.
Together Group Limited have launched a cycle-to-work scheme, which one of their team has taken advantage of. Their original salary is £40,000 and the cost of the bike and accessories are £1,000. This changes their gross salary to £39,000, with the following breakdown for the employer:
Before Salary Sacrifice:
- Original Salary: £40,000
- Earnings above Secondary Threshold (ST): £40,000 – £5,000 = £35,000
- Total Employer’s NI contribution: 15% of £35,000 = £5,250
After Salary Sacrifice:
- Reduced Salary: £39,000
- Earnings above Secondary Threshold (ST): £39,000 – £5,000 = £34,000
- Total Employer’s NI contribution: 15% of £34,000 = £5,100
Summary:
- Total NIC before salary sacrifice: £5,250
- Total NIC after salary sacrifice: £5,100
By implementing the Cycle to Work scheme, the employer saves £150 in National Insurance contributions, while also doing its bit for the planet!
Additional benefits for employers
While the NIC saving might be enough to make you feel that a salary sacrifice scheme would be a great idea for your company, the good news doesn’t stop there! Salary Sacrifices have additional benefits for employers including:
- Reduced pension administration costs
- Potential corporation tax savings
- Enhanced environmental credentials (particularly with cycle and EV schemes)
- Simplified benefit administration
- Increased employee satisfaction and productivity
Benefits of Salary Sacrifice for employees
Salary Sacrifice clearly has advantages from a business point of view, but as the employee is consenting to give up part of their salary, it needs to be just as attractive to them too. The key advantages for employees fall into both financial and lifestyle benefits:
Financial benefits
The financial advantages of salary sacrifice schemes can be substantial for employees. One of the most immediate benefits is the potential for increased take-home pay, particularly when making pension contributions through the scheme.
By sacrificing part of their salary before tax, employees receive immediate tax relief at their highest marginal rate and benefit from reduced National Insurance contributions. The scheme also opens up access to a wide range of benefits at discounted rates, making it a cost-effective way to purchase expensive items like electric vehicles that might otherwise be out of reach.
Let’s look at a practical example for an employee earning £35,000 who decides to sacrifice £2,500 a year into their pension:
Before Salary Sacrifice:
- Gross Annual Salary: £35,000
- Income Tax (20%): £4,486
- National Insurance (8%): £1,794.40
- Net Pension Contribution: £2,000
- Take-home pay: £26,719.60
After Salary Sacrifice:
In the above example, the pension provider would ‘gross up’ the employee’s contribution of £2,000 by adding tax relief, increasing the total to £2,500. To provide the same level of pension contribution, the employee would want to sacrifice £2,500.
- Salary Sacrificed: £2,500
- New Gross Salary: £32,500
- Income Tax (20%): £3,986
- National Insurance (8%): £1,584
- Take-home pay: £26,919.60
That would increase the annual take-home pay by £200.
Lifestyle benefits
Beyond the pure financial advantages, salary sacrifice schemes can significantly enhance an employee’s quality of life. The scheme makes various non-cash benefits more accessible, potentially transforming what might seem like luxury items into affordable options.
For those planning for the future, the ability to boost pension contributions through the scheme can make a meaningful difference to retirement planning. The scheme also supports environmentally conscious choices through green transport options like cycle-to-work or electric vehicle schemes.
Families can benefit too, with potential savings on childcare costs making quality childcare more affordable. Additionally, the scheme can provide access to better technology and equipment, helping employees stay connected and productive both at work and at home.
Can my company use Salary Sacrifice?
Setting up a salary sacrifice scheme is possible for any company, provided employees consent to the arrangement and certain key requirements are met. The process needs careful attention to detail, starting with proper documentation and contractual changes that clearly outline the terms of the sacrifice.
Employee consent is crucial, and this must be properly recorded and maintained. Your scheme must ensure compliance with minimum wage legislation, as sacrifices cannot reduce pay below this threshold. HMRC has specific requirements that need to be met, and these should be carefully reviewed with tax advisers.
It’s also important to have a clear opt-out process in place, giving employees the flexibility to make changes when needed. Regular scheme reviews should be conducted to ensure continued compliance and effectiveness, keeping the benefits relevant and valuable for all participants.
What are the downsides of Salary Sacrifice?
When discussing this with your employees, it’s important to note that this scheme could have downsides which you’ll need to make them aware of before committing:
Impact on benefits and protection
- A reduction in state benefits – With a lower official salary, the employee will see an impact on their maternity/paternity pay, sick pay and other benefits.
- Existing protection – The employee will not be as well covered should your company offer death in service, or they have taken out income protection, due to the change in salary.
Financial considerations
- Impact on credit – Financial products such as mortgages, credit cards and personal loans all use salary assessments. This will mean the employees borrowing power will be lower.
- Bargaining power in the future – A lower base salary can be taken into account by future employers or when negotiating future salary increases.
Employer limitations
While salary sacrifice schemes offer numerous benefits, employers need to be aware of certain limitations and requirements when implementing them.
A fundamental consideration is that any salary sacrifice arrangement must not reduce an employee’s pay below the National Minimum Wage – this is a legal requirement that cannot be circumvented. Employers must also ensure they continue to meet all statutory pay entitlements, as these form part of their legal obligations to employees.
The introduction of a salary sacrifice scheme doesn’t affect the company’s responsibilities under auto-enrolment legislation either – minimum pension contributions must still be maintained based on the pre-sacrifice salary to ensure compliance with pension regulations. To stay on top of these various requirements, regular compliance reviews are essential, helping to identify and address any potential issues before they become problems.
These reviews also provide an opportunity to assess the scheme’s effectiveness and make any necessary adjustments to better serve both the company and its employees.
Want to find out more about Salary Sacrifice?
It’s clear that offering a Salary Sacrifice Scheme can have major benefits for both employers and employees. The key to success lies in careful planning, clear communication, and regular reviews to ensure the scheme continues to meet everyone’s needs.
If you feel it’s something you’d like to know more about, get in touch with our expert team to discuss whether salary sacrifice is the right move for your company and your employees and how we can support you to get one set up.
