The Labour government’s first Budget in Autumn 2024 may have come as a shock for some employers. In addition to the 1.2 percentage point rise in employer’s national insurance contributions (NICs), the Chancellor announced that the threshold at which employers start paying NICs for each employee would fall from £9,100 to £5,000.
Both take effect in April, leaving business owners and finance directors little time to work out how they are going to absorb these extra costs.
A BDO survey of mid-market businesses in January 2025 found that 47% of employers are looking to salary sacrifice schemes as a means of mitigating the impact. A similar proportion (44%) said they would look to outsource or offshore work, 24% reported that they would look to reduce or scrap planned pay increases or bonuses, while 21% said they would reduce hiring.
The logic for finance directors of prioritising salary sacrifice arrangements seems clear: not only can they offer NIC savings for both employees and employers where certain benefits such as pensions are offered, they are less disruptive than other alternatives.
Although operating a pension salary sacrifice arrangement is a well-established practice, it is not straightforward. The legal arrangements and the associated contracts must be watertight, so professional advice here is a must.
To ensure take-up is sufficient to make a real difference to their bottom line, employers have a key role in helping employees understand the benefits of increasing their pension contributions using salary sacrifice.
Not only will this help raise employees’ retirement savings, it could also help working parents earning just above the £60,000, £80,000 and £100,000 thresholds to bring down their net adjusted income in order to retain some, or all, of their entitlements to child benefit or free childcare.
Electric vehicle schemes are also gaining popularity through salary sacrifice arrangements. While the available savings will depend on the model and its list price, the benefit-in-kind charge is just 2% of the list price of the car this year or 3% in 2025/26, offering both employees and employers attractive savings.
One word of caution though. With the national minimum wage also increasing from April, employers need to take extra care that salary sacrifice arrangements do not reduce an employee’s earnings below the minimum. If HM Revenue and Customs finds evidence of non-compliance, it can name and shame, as well as impose penalties.
Caroline Harwood is an employment tax partner at BDO
