Many employers whether large or small are concerned with rising employment costs and are looking for ways to legally reduce their Employer National Insurance Costs (NICs) without impacting employee pay. The good news is that there are several government-backed schemes and payroll strategies that can help businesses cut NIC expenses while remaining fully compliant.
In this guide, we’ll explore practical ways for UK employers to reduce their NIC liabilities in 2025, including Employment Allowance, salary sacrifice schemes, pension contributions, and workforce planning.
1. Employment Allowance – Claim Up to £10,500 from April 2025
One of the easiest ways to reduce employer NIC is by claiming the Employment Allowance, which allows eligible businesses to reduce their NIC liability by up to £10,500 (an increase from £5,000 in 2024).
Who Can Claim?
- Businesses with Class 1 NIC liabilities under £100,000 in the previous tax year.
- Limited companies with more than one employee on the payroll.
- Sole traders and partnerships employing staff.
How Much Can Employers Save on their National Insurance?
The amount an employer can save depends on their annual NIC liability. With the Employment Allowance increasing to £10,500 in April 2025, many small businesses will be able to eliminate or significantly reduce their employer National Insurance costs.
Example :
1️⃣ Small Business with Lower NIC Liability
- A business with an annual NIC liability of £9,000 can completely offset this amount using the Employment Allowance, meaning they pay £0 in employer NICs for the year.
2️⃣ Medium-Sized Business with a NIC Liability Above £10,500
- If a business has an annual NIC liability of £15,000, they will only pay NIC on the amount exceeding £10,500.
- This means their final NIC bill is £4,500 instead of £15,000 – a 70% reduction.
3️⃣ Larger Business Exceeding the £100,000 NIC Threshold
- If a business pays over £100,000 in Class 1 NICs annually, they do not qualify for the Employment Allowance.
- However, they can still use salary sacrifice and pension salary exchange to reduce NIC costs.
Employment Allowance Savings Breakdown:
| Annual NIC Liability | Employment Allowance Deduction | Final Employer NIC Cost | % Savings |
|---|---|---|---|
| £7,000 | £7,000 | £0 | 100% |
| £9,500 | £9,500 | £0 | 100% |
| £10,500 | £10,500 | £0 | 100% |
| £12,000 | £10,500 | £1,500 | 87.5% |
| £15,000 | £10,500 | £4,500 | 70% |
| £20,000 | £10,500 | £9,500 | 52.5% |
How to Claim the Allowance
Employers can apply for the Employment Allowance through their payroll software (such as Sage or BrightPay) or via HMRC’s Basic PAYE Tools. The allowance is automatically deducted from employer NICs throughout the tax year until the full £10,500 has been used.
📌 More on Employment Allowance from HMRC
2. Salary Sacrifice Schemes – Reduce Tax and Employers National Insurance
Salary sacrifice is a cost-effective way to reduce NICs for both employers and employees. Employees agree to exchange part of their salary for a non-cash benefit, reducing the amount of taxable income and lowering employer NICs.
Popular Salary Sacrifice Schemes
✅ Pension Salary Exchange – Reduces NICs by replacing employee pension contributions with employer contributions.
✅ Cycle-to-Work Scheme – Allows employees to purchase bicycles tax-free, reducing NIC costs.
✅ Electric Car Scheme – Provides tax-efficient access to electric vehicles through payroll.
How Much Can Employers Save with Pension Salary Exchange?
Pension salary exchange (also known as salary sacrifice for pensions) is one of the most effective ways to reduce employer National Insurance Contributions (NICs) while increasing employees’ pension savings. By restructuring pension contributions, businesses can legally lower their payroll costs while maintaining employee take-home pay.
Example: Calculate Employer NI Saving on Salary Sacrifice
Let’s break it down:
- Company Size: 50 employees
- Average Salary: £36,000
- Pension Contribution (via Salary Exchange): 5% (£1,800 per employee per year)
- Employer NIC Rate: 13.8%
NIC Savings Calculation
Each employee reduces their gross salary by £1,800, and instead, the employer contributes this amount directly to their pension. Since employer NICs are calculated after salary sacrifice, the business does not pay NICs on the exchanged amount.
NIC Savings per Employee:
£1,800 × 13.8% = £248 per employee
Total NIC Savings for 50 Employees:
50 × £248 = £12,400 per year
Scaling the Savings: What if More Employees Use Salary Exchange?
| No. of Employees | Average Salary | Pension Contribution (5%) | Total NIC Savings |
|---|---|---|---|
| 10 | £36,000 | £1,800 per employee | £2,480 |
| 25 | £36,000 | £1,800 per employee | £6,200 |
| 50 | £36,000 | £1,800 per employee | £12,400 |
| 100 | £36,000 | £1,800 per employee | £24,800 |
| 250 | £36,000 | £1,800 per employee | £62,000 |
💡 For businesses with larger workforces, the savings quickly add up—potentially cutting NIC costs by over £60,000 annually!
Additional Benefits of Salary Exchange for Employers
✅ Significant cost savings on employer NICs
✅ Employees benefit from higher pension contributions without reducing take-home pay
✅ No impact on salary-related benefits like bonuses, overtime, or redundancy pay
✅ A great incentive to attract and retain staff by enhancing pension contributions
📌 More on Salary Sacrifice from Gov.uk
3. Pension Contributions – Save on Employers National Insurance with Salary Exchange
A pension salary exchange (or salary sacrifice for pensions) is one of the most effective ways to lower employer NIC liabilities. Instead of making pension contributions from post-tax earnings, employees agree to exchange part of their salary for enhanced employer pension contributions.
NIC Savings Example
| Employee Salary | Pension Exchange | Employer NIC Savings |
|---|---|---|
| £36,000 | 5% (£1,800) | £248 per employee |
| £50,000 | 5% (£2,500) | £344 per employee |
| £75,000 | 5% (£3,750) | £516 per employee |
For a company with 100 employees, these savings could add up to £25,000+ per year in reduced NIC costs.
4. Hire Apprentices and Save on NICs
Employers hiring apprentices under 25 years old do not have to pay Class 1 NICs on their earnings up to the Upper Earnings Limit (£967 per week for 2025).
Benefits of Hiring Apprentices
✅ 0% employer NICs for apprentices under 25.
✅ Government apprenticeship levy funding to support training costs.
✅ Improved staff retention by training employees in-house.
📌 Apprenticeship Funding Guide
5. Adjust Workforce Planning – Optimise Payroll Costs
Strategic workforce planning can also help manage NIC liabilities efficiently. Employers can consider:
✔ Flexible working arrangements – Reducing NIC costs through compressed hours or remote work salary structures.
✔ Annual leave purchase schemes – Allowing employees to buy additional leave through salary sacrifice.
✔ Engaging self-employed contractors – Where appropriate and in line with IR35 rules, hiring freelancers can reduce NIC liabilities.
📌 More on IR35 and Employment Status
Frequently Asked Questions (FAQs)
1. What is the most effective way to reduce employer NICs?
The Employment Allowance is the quickest way to save, offering up to £10,500 off NICs in 2025. However, salary sacrifice schemes and pension salary exchange also provide significant long-term savings.
2. Is salary sacrifice still beneficial after recent tax changes?
Yes, salary sacrifice remains one of the best ways to reduce NICs, particularly for pension contributions, as it provides tax relief and NIC savings.
3. How do I know if my business qualifies for Employment Allowance?
If your Class 1 NIC liability is below £100,000, and your company has more than one employee, you likely qualify. You can apply through HMRC’s payroll software or ask your payroll provider to handle the claim.
4. Does salary sacrifice reduce employer National Insurance contributions?
Yes, salary sacrifice can reduce employer National Insurance Contributions (NICs). When an employee agrees to exchange part of their salary for non-cash benefits such as pension contributions, cycle-to-work schemes, or electric car schemes, their gross taxable salary decreases. This means the employer pays NICs on a lower amount, leading to cost savings. For example, using pension salary exchange, employers can save 13.8% on the sacrificed amount in NICs while employees benefit from increased pension contributions without reducing take-home pay.
5. Can I use more than one NIC-saving strategy?
Absolutely! Businesses can combine Employment Allowance, salary sacrifice, pension salary exchange, and apprenticeship hiring to maximize their Employers National Insurance savings.
Reducing National Insurance costs doesn’t have to be complicated. By leveraging Employment Allowance, salary sacrifice schemes, pension strategies, and workforce planning, businesses can legally cut payroll costs while remaining compliant with HMRC regulations.
If you’re unsure about the best strategy for your business, our payroll team at Crystal HR & Payroll Ltd can help you identify savings opportunities and implement the right NIC reduction methods.
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