How employers can offset NIC increases with salary sacrifice pension schemes

Starting April 6, 2025, the rate of Class 1 Employers' national insurance contributions (NIC) will rise by 1.2% to 15%. Additionally, the threshold for employers’ NIC on earnings will decrease from £9,100 to £5,000, costing £615 per employee due to this change alone. 

The employers’ NIC increase also applies to Class 1A and Class 1B NIC paid on benefits in kind reported on P11Ds (or payrolled benefits) and through PAYE Settlement Agreements. 

 

Before the Budget, there was speculation that the government might introduce an employers’ NIC charge on employer pension contributions, potentially negating the benefits of salary sacrifice pension schemes. However, employer pension contributions remained unaffected, preserving salary sacrifice as an efficient method for funding pension schemes, beneficial for both employees and employers. 

Under a salary sacrifice pension scheme, employees agree to forego a portion of their salary in exchange for an employer pension contribution directly to the pension provider. When implemented correctly, salary sacrifice pension contributions result in NIC savings for both employees and employers. 

Employers with existing salary sacrifice pension schemes should assess participation levels to ensure maximum engagement (e.g., verifying awareness of maximum contribution levels among employees). 

 

• Employees’ NIC savings: Besides the tax efficiency of employee pension contributions, salary sacrifice reduces employees’ NIC. 

• Employers’ NIC savings: Salary sacrifice replaces taxable earnings subject to employers’ NIC with a NIC-free benefit, saving employers 15% (from April 2025) on the amount sacrificed. 

For instance, an employer with 100 employees averaging £50,000 annually faces approximately £100,000 more in employers’ NIC annually starting April 2025 without salary sacrifice. Introducing salary sacrifice with an average contribution rate of 6% could reduce this increase to around £55,000, resulting in a yearly saving of £45,000. 

• Retention tool: Some employers share employers’ NIC savings with employees by increasing employer contribution levels, which can help retain and attract talent. 

• Flexibility for employees: Employees can opt to waive bonuses in favor of employer pension contributions, offering flexibility in retirement savings and potentially lowering their overall tax liability. 

 

• National Minimum Wage (NMW): Salary sacrifice reduces pay for NMW purposes, requiring exclusion of certain lower-paid employees and ensuring compliance with NMW regulations. 

• Effective implementation: Properly implementing salary sacrifice arrangements requires employees to forgo earnings rights before entitlement. 

• Employee income levels: Salary sacrifice affects taxable income, potentially impacting borrowing ability and eligibility for income-based benefits. 

Other strategies to consider: 

• Ultra-low emission vehicles (ULEVs) and cycle-to-work schemes can also be offered under salary sacrifice, though savings may be smaller compared to pensions. 

• NIC categories: Reviewing NIC treatment for employees, such as apprentices under 25 earning less than £50,270, ensures correct NIC application. 

• Value for money: Assess existing benefit providers for cost-effectiveness, especially with the NIC increase affecting Class 1A NIC on benefits in kind. 

 

In conclusion, while the NIC increase and lower secondary threshold will raise costs for employers, implementing a well-structured salary sacrifice pension scheme can help mitigate these effects effectively.