National Insurance and Salary Sacrifice

From April 2025, the employer National Insurance (NI) contribution rate will rise from 13.8% to 15%, and the threshold at which employers start paying NI will drop from £9,100 to £5,000 per employee. This means businesses will pay more NI on employee salaries.

The changes will significantly increase payroll costs. For example, an employer will pay an additional £900 annually for an employee earning the median UK salary. Businesses with large workforces will see these costs quickly add up.

The Employment Allowance reduces the amount of employer NI that smaller businesses have to pay. From April 2025, the allowance will increase from £5,000 to £10,500. Eligible small businesses may avoid paying NI altogether.

Salary sacrifice is a tax-efficient scheme where employees agree to give up a portion of their gross salary in exchange for non-cash benefits, such as pension contributions. This reduces their taxable salary, saving both employees and employers on National Insurance.

By lowering an employee’s gross salary, salary sacrifice reduces the amount of NI contributions owed by both the employer and the employee. Employers can save up to 15% on the sacrificed portion of each employee’s salary.

Employees benefit by:
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1. Increasing their pension contributions without reducing take-home pay.
2. Saving on National Insurance and income tax.
3. Potentially avoiding higher tax bands, depending on their salary.

Most employees can participate, but there are exceptions:

- Employees earning close to the National Minimum Wage may not be eligible.
- Those receiving statutory benefits (e.g., maternity or sick pay) may be affected.

1. Contact your payroll or pension provider to ensure they can support salary sacrifice.
2. Amend employee contracts to reflect the change.
3. Communicate the benefits to employees and manage their opt-ins.
4. Integrate the scheme into your payroll system.

Penfold makes this process seamless with free consultation, setup, and ongoing support.

Yes, it can impact salary-based benefits like:

• Statutory maternity pay
• Life insurance
• Mortgage applications

However, many providers can account for the adjusted salary when assessing eligibility.

If an employee opts out, their gross salary returns to its original level, and they no longer benefit from the associated tax and NI savings. Employers must update payroll accordingly.

Penfold handles all aspects of compliance, including:

• Ensuring contracts are updated correctly.
• Providing detailed reporting.
• Conducting regular checks to meet regulatory requirements.

Yes, Penfold can work with your existing setup or provide a full-service pension platform with integrated salary sacrifice solutions.

Savings depend on the number of employees, their salaries, and the amount sacrificed. For example, a business with 50 employees earning an average of £35,000 could save up to £17,250 annually. Use our Savings Calculator to estimate your savings.

Yes, many employers choose to reinvest their NI savings into employees’ pensions as an added benefit. This enhances employee satisfaction and retention.

Our experts are here to help. Contact us for tailored advice on National Insurance and salary sacrifice.