With rising NI costs, UK employers are increasingly adopting salary sacrifice pension schemes to reduce their NI contributions while enhancing employee benefits. This guide provides a look at how salary sacrifice works, tax implications, and an example to illustrate potential savings for employers and employees.
What is Salary Sacrifice?
In short, it's and arrangement whereby an employee agrees to sacrifice part of their gross pay toward benefits, such as pension contributions. This reduces their taxable income and lowers both Income Tax and National Insurance contributions (NICs) for both employer and employee.
Why Salary Sacrifice is Beneficial Post-Budget
Following recent budget changes, the employer NI rate will increase from 13.8% to 15% starting April 2025, with the secondary threshold for NI decreasing from £9,100 to £5,000, the point at which employers pay NIC. These adjustments make it a more attractive strategy to manage payroll costs effectively.
Example: Small Business with 5 Employees Earning £30,000 Annually
Let’s consider a small business with five employees, each earning £30,000 per year. Each employee agrees to sacrifice £3,000 annually for pension contributions. Here’s how the savings compare.
Comparison Table: Employer NI Savings with and without Salary Sacrifice
| Tax Year | Salary Sacrifice | Employer NI Rate | Secondary Threshold | Employer NI Savings per Employee | Total Employer NI Savings (5 Employees) |
|---|---|---|---|---|---|
| 2024/25 | No | 13.8% | £9,100 | £0 | £0 |
| 2024/25 | Yes (£3,000) | 13.8% | £9,100 | £414 | £2,070 |
| 2025/26 | No | 15% | £5,000 | £0 | £0 |
| 2025/26 | Yes (£3,000) | 15% | £5,000 | £450 | £2,250 |
In this example:
- 2024/25: With sacrifice, the employer saves £2,070 annually on NI contributions for five employees.
- 2025/26: With the rate increase, NI savings rise to £2,250 annually for the same contributions, providing additional savings.
Tax Implications and Employee Benefits
For Employers:
- National Insurance Savings: Employers save 13.8% (2024/25) and 15% (2025/26) on NI for each pound employees contribute, reducing overall payroll costs.
- Reinvesting Savings: Employers can use NI savings for other business needs, such as training or invest in their employees etc
For Employees:
- Income Tax and NI Savings: Employees benefit from reduced taxable income, resulting in savings on Income Tax and NI.
- Pension Contributions: Sacrificed salary goes directly into the employees pension, growing retirement savings without significantly affecting take-home pay.
- Note on Pension Tax Relief: Employees do not receive personal tax relief on the sacrificed amount, as it’s treated as an employer contribution. However, the NI and Income Tax savings can offset this for basic-rate taxpayers.
How the Tax Works
- Employer Contributions: The sacrificed amount is contributed to the employee’s pension, bypassing Income Tax and employee NI.
- Impact on Gross Salary: Lower gross salary means reduced taxable income, which cuts Income Tax and NI.
- Example Employee Savings:
- Employee NI Savings: 8% of £3,000 = £240 (2025/26)
- Income Tax Savings: 20% of £3,000 = £600
- Total Employee Savings: £840 annually, boosting their pension fund with minimal impact on net income.
Step-by-Step Guide to Implementing Salary Sacrifice
- Review Contracts: Confirm contracts permit salary adjustments, as any new arrangement can impact an employees gross pay.
- Inform Employees: Explain the benefits, including potential take-home pay, impacts and pension contributions.
- Adjust Payroll Systems: Ensure payroll accurately reflects the new pension contributions.
- Ensure Compliance: Verify that post-sacrifice earnings meet the National Minimum Wage.
Important Considerations
- National Minimum Wage Compliance: Ensure employees’ post-salary remains above the minimum wage.
- Annual Review: Regularly review contributions to align with NI thresholds and tax changes.
- Clear Communication: Transparently inform employees about the new arrangement, tax savings, and pension contributions.
Additional Resources
For more information visit:
- GOV.UK: Salary Sacrifice and Workplace Pensions
- The Pension Advisory Service: Salary Sacrifice Guide
Conclusion
Salary sacrifice pension schemes provide substantial savings for employers and employees. With NI rates increasing in 2025, now is an ideal time for businesses to consider salary sacrifice arrangements.
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If you found this article useful, check our some of our other articles:
- Employment Rights Bill: How does it affect employers?
- What Business Expenses Can I Claim? An Employers Guide
- Tax Rates and Thresholds for the 2024/25 Tax Year
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