Using salary sacrifice to beat the rise in employer’s nic

Employer’s National Insurance contributions have become an increasingly significant business expense, especially following the recent threshold reductions. With rates climbing and allowances shrinking, many employers are exploring legitimate strategies to manage their payroll costs effectively. Salary sacrifice schemes offer one of the most practical solutions available to UK businesses today. Let’s explore how they work and why they might be worth considering for your organisation.

What is salary sacrifice and why does it matter now?

Salary sacrifice is a straightforward arrangement where an employee agrees to give up part of their gross salary in exchange for a non-cash benefit. The key advantage is that the foregone salary isn’t subject to employer’s National Insurance contributions (NICs), resulting in genuine savings for the business.

From April 2024, the employer’s NIC threshold dropped to £9,100 annually, with the rate set at 15% on earnings above this point. For many employers, this means a significant increase in their payroll costs—even when employee salaries remain static. Salary sacrifice schemes can help offset these pressures by reducing the amount of salary subject to NICs.

Which benefits work best with salary sacrifice?

Not all benefits are suitable for salary sacrifice arrangements, but several popular options offer real value:

Pension contributions remain the gold standard. When an employee sacrifices salary to boost their pension contributions, both employer and employee benefit from NIC savings. The employer saves 15% NIC on the sacrificed amount, whilst the employee avoids both income tax and employee’s NIC at their marginal rate (typically 20% or 40%). This is particularly effective for higher earners.

Childcare vouchers and Tax-Free Childcare support are excellent for employers with younger employees. Sacrificing up to £55 per week (£243 per month) can deliver meaningful savings for working parents, whilst your business benefits from the NIC relief.

Cycle to Work schemes under the Cycle Scheme are popular, cost-effective options. Employees can sacrifice up to £1,000 per tax year to lease a bicycle and safety equipment, with both parties enjoying tax and NIC advantages.

Ultra-low emission vehicle leasing has become increasingly attractive as businesses focus on sustainability. Sacrificing salary to cover lease payments on qualifying vehicles delivers NIC savings without affecting take-home pay significantly.

The rules around salary sacrifice can be strict, so it’s essential to ensure your scheme is properly documented and compliant with HMRC requirements.

Setting up a compliant scheme

Establishing a salary sacrifice arrangement requires more than a casual conversation with staff. HMRC expects formal documentation outlining the arrangement, the benefits provided, and confirmation that employees have genuinely agreed to the reduction in salary.

Crucially, you must ensure the sacrificed amount doesn’t reduce an employee’s salary below National Minimum Wage or National Living Wage thresholds. This is a common pitfall. If an employee is entitled to £11.44 per hour (the adult minimum wage for 2024–25), their gross pay cannot fall below that rate, even with salary sacrifice in place.

You’ll also need to update your payroll records and ensure your accounting software correctly reflects the arrangement. The sacrificed amount should be removed from the calculation of employer’s NIC but included in other statutory calculations where relevant (such as statutory sick pay entitlements, which are based on normal wages).

The financial impact on your bottom line

The savings depend on your payroll structure and the benefits chosen, but they’re often substantial. On a £10,000 annual salary sacrifice, you’d typically save £1,500 in employer’s NIC alone. Across multiple employees, these savings accumulate quickly.

However, it’s worth noting that salary sacrifice can affect certain benefits calculations—for example, Statutory Maternity Pay is based on average earnings, so sacrificing salary might reduce entitlements. This is another reason to seek professional guidance before implementation.

Getting started

Salary sacrifice schemes aren’t a one-size-fits-all solution, and their effectiveness varies depending on your workforce composition and business circumstances. What works brilliantly for a tech start-up with young employees might differ from a manufacturing business with an older workforce.

The investment in setting up a compliant scheme typically pays for itself within months, and the ongoing savings continue year after year. With employer’s NIC costs showing no sign of decreasing, now is an excellent time to review whether salary sacrifice could work for your business.

For tailored advice on implementing a salary sacrifice scheme that suits your specific situation, contact Severn Accounting — we’re here to help.