With Employer National Insurance Contributions (NICs) increasing in April 2025, businesses across the UK are concerned about the substantial financial impact these changes will bring.

But what if there were a strategy to buffer your organisation against these rising costs whilst simultaneously offering valuable benefits to your staff? The good news is that Salary Sacrifice Schemes present exactly this opportunity! Many financial advisers are already recommending them as an effective method to offset the NIC increases. 

But what precisely is a salary sacrifice scheme? How does it function, and which businesses can implement it?

Understanding Salary Sacrifice

The concept operates when employees voluntarily relinquish a portion of their salary to contribute towards personally beneficial arrangements. These can include pension contributions, childcare vouchers, additional annual leave, gym memberships, mobile phones, or even technology devices!

By exchanging part of their salary for a benefit, employees effectively exempt that portion from both income tax and NICs. This results in a reduced net taxable salary not only for staff but also for employers, making it a particularly effective strategy to counteract some of the forthcoming NIC changes.

Employer Advantages of Salary Sacrifice

The principal benefit for employers is the reduction in employer NIC contributions, but what does this saving look like in practical terms?

Calculating NIC Savings for Employers

Excellent Enterprises Ltd – Pension Example

Excellent Enterprises employs 100 staff members who, for simplicity, each earn £30,000 annually.

Without a Salary Sacrifice scheme, from April 2025 they would face the following yearly expenditure:

• Gross Salary Payments – £3,000,000
• Employer NI Contributions (at the increased rate of 15%) – £375,000
• Employer Pension Contributions – £90,000
• Total annual cost to Excellent Enterprises – £3,465,000

However, if all 100 employees opted to participate in a salary sacrifice scheme, each sacrificing £1,500 annually into their pension, the financial picture changes significantly:

• Gross Salary Payments – £2,850,000 (reflecting the £150,000 total salary sacrifice)
• Employer NI Contributions – £352,500
• Employer Pension Contributions – £240,000
• Total annual cost to Excellent Enterprises after implementing salary sacrifice – £3,442,500

This represents a total saving of £22,500 across the entire workforce!

Unity Group Ltd – Cycle to Work Scheme Example

While pension arrangements are common salary sacrifice options, they aren't the only avenues offering tax efficiencies for employers.

Unity Group has introduced a cycle-to-work scheme, which one team member has utilised. Their original salary is £40,000, and they've selected a bicycle and accessories totalling £1,000. This adjusts their gross salary to £39,000, with the following impact for the employer:

Before Salary Sacrifice:

• Original Salary: £40,000
• Earnings exceeding Secondary Threshold (ST): £40,000 – £5,000 = £35,000
• Total Employer's NI contribution: 15% of £35,000 = £5,250

After Salary Sacrifice:

• Adjusted Salary: £39,000
• Earnings exceeding Secondary Threshold (ST): £39,000 – £5,000 = £34,000
• Total Employer's NI contribution: 15% of £34,000 = £5,100

Summary:

• NIC liability before salary sacrifice: £5,250
• NIC liability after salary sacrifice: £5,100

By implementing the Cycle to Work scheme, Unity Group achieves a £150 saving in National Insurance contributions whilst simultaneously supporting environmental sustainability!

Additional Employer Benefits

While the NIC reduction might already be compelling enough to consider a salary sacrifice scheme for your business, the advantages extend further! Salary Sacrifice arrangements offer employers several additional benefits:

• Decreased pension administration expenses
• Potential corporation tax efficiencies
• Enhanced environmental credentials (particularly with cycling and electric vehicle schemes)
• Streamlined benefits administration
• Improved employee satisfaction and productivity levels

Employee Advantages of Salary Sacrifice

Salary Sacrifice clearly delivers benefits from a business perspective, but since employees are agreeing to surrender part of their salary, the arrangement must be equally appealing to them. The primary advantages for employees encompass both financial and lifestyle enhancements:

Financial Advantages

The monetary benefits of salary sacrifice schemes can be considerable for employees. One of the most immediate advantages is the potential increase in take-home pay, particularly when directing pension contributions through the scheme.

By sacrificing a portion of their pre-tax salary, employees receive immediate tax relief at their highest marginal rate and benefit from lower National Insurance contributions. The scheme also provides access to various benefits at discounted rates, offering a cost-effective way to acquire expensive items such as electric vehicles that might otherwise be unaffordable.

Let's examine a practical example for an employee earning £35,000 who decides to sacrifice £2,500 annually towards their pension:

Before Salary Sacrifice:

• Gross Annual Salary: £35,000
• Income Tax (20%): £4,486
• National Insurance (8%): £1,794.40
• Net Pension Contribution: £2,000
• Take-home pay: £26,719.60

After Salary Sacrifice:

Typically, pension providers would 'gross up' an employee's £2,000 contribution by adding tax relief, increasing the total to £2,500. To maintain equivalent pension contributions, the employee would sacrifice £2,500.

• Salary Sacrificed: £2,500
• Revised Gross Salary: £32,500
• Income Tax (20%): £3,986
• National Insurance (8%): £1,584
• Take-home pay: £26,919.60

This arrangement would increase annual take-home pay by £200.

Lifestyle Advantages

Beyond the pure financial benefits, salary sacrifice schemes can markedly enhance an employee's quality of life. The arrangement makes various non-cash benefits more accessible, potentially transforming seemingly luxury items into affordable options.

For those planning ahead, the ability to boost pension contributions through the scheme can significantly impact retirement planning. The scheme also supports environmentally conscious choices through green transport options like cycle-to-work or electric vehicle programmes.

Families benefit too, with potential savings on childcare costs making quality care more affordable. Additionally, the scheme can facilitate access to better technology and equipment, helping employees remain connected and productive both professionally and personally.

Is My Business Eligible for Salary Sacrifice?

Establishing a salary sacrifice scheme is feasible for any company, provided employees consent to the arrangement and certain key requirements are satisfied. The process demands careful attention to detail, beginning with proper documentation and contractual amendments that clearly outline the sacrifice terms.

Employee consent is essential, and this must be properly documented and preserved. Your scheme must ensure compliance with minimum wage legislation, as sacrifices cannot reduce remuneration below this threshold. HMRC has specific requirements that must be met, and these should be carefully reviewed with tax specialists.

It's also important to establish a clear opt-out procedure, giving employees flexibility to make changes when necessary. Regular scheme reviews should be conducted to ensure continued compliance and effectiveness, keeping the benefits relevant and valuable for all participants.

Potential Drawbacks of Salary Sacrifice

When discussing this with your employees, it's important to highlight potential disadvantages they should consider before committing:

Impact on Benefits and Protection

• Reduction in state benefits – With a lower official salary, employees may see impacts on maternity/paternity pay, statutory sick pay and other benefits.
• Existing protection – Employees may have reduced coverage under company death in service benefits or personal income protection policies due to the adjusted salary.

Financial Considerations

• Impact on credit – Financial products such as mortgages, credit cards and personal loans rely on salary assessments. Consequently, employees' borrowing capacity may be reduced.
• Future negotiating power – A lower base salary might influence considerations by future employers or affect leverage when negotiating future salary increases.

Employer Limitations

While salary sacrifice schemes offer numerous benefits, employers should be aware of certain limitations and requirements when implementing them.

A fundamental consideration is that salary sacrifice arrangements must never reduce an employee's pay below the National Minimum Wage – this is a non-negotiable legal requirement. Employers must also ensure they continue to meet all statutory pay entitlements, fulfilling their legal obligations to employees.

Introducing a salary sacrifice scheme doesn't alter the company's responsibilities under auto-enrolment legislation either – minimum pension contributions must still be maintained based on pre-sacrifice salary levels to ensure compliance with pension regulations. To manage these various requirements effectively, regular compliance reviews are essential, helping to identify and address potential issues proactively.

These reviews also provide opportunities to assess the scheme's effectiveness and implement necessary adjustments to better serve both the company and its workforce.

Exploring Salary Sacrifice Further

It's evident that offering a Salary Sacrifice Scheme can deliver significant benefits for both employers and employees. Success hinges on careful planning, transparent communication, and regular reviews to ensure the scheme continues meeting everyone's needs.

If you're interested in learning more, contact our specialist team to discuss whether salary sacrifice is appropriate for your company and employees, and how we can support you in establishing an effective scheme.