In the run up to the Labour government’s first Budget this week, there was much speculation about how this would impact employers.
I think the industry breathed a collective sigh of relief when the tax relief on pensions salary sacrifice arrangements was not touched, as had initially been feared. As it transpired, several of the measures announced impacting employers could actually make such arrangements more attractive to organisations.
From 6 April 2025, employer national insurance contributions (NICs) are set to increase by 1.2 percentage points from 13.8% to 15%. In addition, the earnings threshold at which this applies will be cut from £9,100 to £5,000. Although the government also announced several measures aimed at assisting small businesses, such as increasing the Employment Allowance from £5,000 to £10,500 and removing the £100,000 threshold, the increase in employer NICs will still result in a significant increase in costs for numerous organisations.
Since Chancellor Rachel Reeves’ Budget announcement, several industry practitioners have highlighted how the use of arrangements, such as pensions salary sacrifice, could result in NI savings for employers where they are not currently using such arrangements. For example, Gary Smith, partner in financial planning and retirement specialist at Evelyn Partners, said: “Say that the employer currently has a workplace pension scheme set up that is not written on a salary sacrifice basis. The employer would currently pay NI on the full salary of each employee above the lower threshold. Let’s say the wage bill was £1 million above the lower level, this would make the employer NI bill currently £138,000, now increasing to £150,000 when the NI rate goes up to 15%.
“On a normal workplace pension scheme the employees would pay 5% of salary into the pension, which would be £50,000 in this example. If the employer converted the scheme to salary sacrifice, this would reduce the wage bill to £950,000 and the NI would reduce to £142,500, a saving to the employer of £7,500.”
Employers’ costs are set to increase further with a 6.7% rise in the national living wage from £11.44 to £12.21 an hour from April 2025. The national minimum wage for 18-20-year-olds and the minimum hourly wage for apprentices are also set to increase.
These changes obviously pose a challenge for employers in terms of how they are going to meet these increased costs. Smaller organisations, in particular, may well struggle with these obligations. So, will higher costs be passed on to customers? Or, as Reeves herself has publicly acknoweldged will employers have to make difficult decisions around pay, other benefits schemes or even around head count?
As organisations continue to digest the Chancellor’s announcement and begin the tricky task of planning for these increased costs, in many cases, there will be no easy answers.
Debbie Lovewell-Tuck
Editor
@DebbieLovewell
