How Salary Sacrifice Can Help Offset Employer’s NIC Increase

The Impact of the Rise in Employer’s NIC

In the upcoming 2025/26 tax year, employers are facing a significant increase in National Insurance Contributions (NIC). From 6 April 2025, the employer’s NIC will rise from 13.8% to 15%, a move that has left many business owners concerned about the added cost. This increase also applies to the Class 1A and Class 1B rates, impacting both cash pay and taxable benefits. Additionally, the new rates will make it more expensive for employers to settle employees’ tax liabilities via a PAYE Settlement Agreement, as Class 1B contributions will apply to both the taxable items and the associated tax liability under the agreement.

Exploring the Benefits of Salary Sacrifice

Despite the rise in NIC, there is an opportunity to mitigate the additional costs through a salary sacrifice arrangement. While the 2017 changes to valuation rules reduced the benefits of salary sacrifice for many perks, it still proves advantageous for certain benefits, such as pension contributions.

For employees looking to top up their pension contributions, a salary sacrifice arrangement can provide substantial National Insurance savings for both the employee and the employer. Let’s explore how this works.

How Salary Sacrifice Works for Pension Contributions

Imagine an employee who wants to contribute an additional £500 a month to their pension. Normally, this contribution would be made from their gross salary, and National Insurance would be calculated on the full pay before pension contributions are deducted. This results in additional NIC for both the employee and the employer.

For the employee, National Insurance would amount to £40 a month if their earnings are between the primary threshold and the upper earnings limit, or £10 if their earnings exceed the upper earnings limit. For the employer, the cost would be £69 a month in 2024/25, rising to £75 a month in 2025/26.

However, by entering into a salary sacrifice arrangement, the employee gives up £500 of their cash salary in exchange for the employer contributing the same amount to their pension scheme. This reduces the employee’s gross pay, which in turn reduces their National Insurance liability. The employee saves between £10 and £40 per month, while the employer saves significantly as well. For example, the employer would save £900 annually on NIC for each £500 monthly salary sacrifice.

Additional Benefits of Salary Sacrifice

Salary sacrifice is not just limited to pension contributions. It can also be used for certain benefits, such as employer-provided cycles and cycling safety equipment, that fall outside the alternative valuation rules. This offers another way for both employees and employers to save on National Insurance contributions.

Important Considerations for Salary Sacrifice

For salary sacrifice to be effective, the employee’s contract must be amended to reflect the reduced salary and the provision of the benefit. It’s essential that the employee cannot revert to the higher salary at will, as this would invalidate the arrangement.

Conclusion: Saving on National Insurance with Salary Sacrifice

Salary sacrifice remains a valuable tool for reducing National Insurance contributions, even in light of the upcoming increase in employer NIC rates. By structuring the right benefits through salary sacrifice, both employees and employers can make the most of potential savings and still maintain pension contributions and other tax-free benefits.

Partner Note: ITEPA 2003, s. 69A.

                                               For more information, Book a Free Consultation