Starting April 6, 2025, employer National Insurance contributions (NIC) will rise from 13.8% to 15%. This increase applies to the salary of each worker above certain thresholds and affects Class 1A and Class 1B contributions, impacting how employers manage taxable benefits and employee tax liabilities.

In simple terms, if you run a business and pay wages above the secondary threshold or if you provide benefits like a company car or private health insurance, you’ll be paying more in NIC. Even covering an employee’s tax through a PAYE Settlement Agreement will become more expensive because Class 1B contributions will apply to the items in the agreement and the tax itself.

So, how can you soften the blow of these extra costs? One powerful strategy is to use a salary sacrifice arrangement, especially for certain benefits that are still advantageous under current tax law.

What Is Salary Sacrifice?

A salary sacrifice arrangement is a deal between an employer and an employee. The employee gives up a portion of their cash salary, and in return, the employer provides a non-cash benefit of equal value. This arrangement has been popular for a while, but the rules changed in April 2017 when the government introduced “alternative valuation rules” that removed many of the old tax advantages.

However, some benefits remain outside these new rules—most notably pension contributions and tax-free perks like cycle-to-work schemes. For these reasons, salary sacrifice can still lead to valuable national insurance savings for both sides.

Example: Pension Contributions

Imagine an employee who wants to put an extra £500 per month into their pension. Under normal circumstances, pension contributions receive tax relief but not National Insurance relief. This means if the employee earns enough to pay NIC, they’ll still lose a slice of that £500 to NIC before it even goes into the pension.

• Employee’s NIC Impact: If the employee’s earnings are between the primary threshold and the upper earnings limit, they will pay £40 of NIC on that £500 each month (8% rate). Above the upper limit, that NIC would drop to £10 a month (2% rate).
• Employer’s NIC Impact: Right now (in the 2024/25 tax year), the employer pays 13.8% NIC on that £500, which is £69 a month. But from April 2025, that rate has climbed to 15%, meaning the monthly NIC cost for the employer has jumped to £75, adding up to £900 a year just in additional employer contributions on that £500 portion of salary.

With salary sacrifice, however, the employee’s gross pay officially drops by £500, and the employer puts that £500 directly into the pension. Because the gross salary is lower, no employee NIC is due on that sacrificed amount. The employer also saves NIC on the reduced salary. All in all:

• The employee saves between £10 and £40 in NIC each month, depending on their earnings level.
• The employer saves 15% on the sacrificed salary (beginning April 2025), which adds up over the year.

Crucially, the pension still receives £500 every month, but both sides end up paying less National Insurance. It’s a win-win if your primary goal is to fund retirement savings more cost-effectively.

Other Eligible Benefits

The alternative valuation rules introduced in 2017 limit which benefits still gain from salary sacrifice. But you can still use this technique for:

• Pension savings: As explained above, this remains one of the biggest opportunities.
• Employer-provided cycles and cycling safety equipment: Under the cycle-to-work scheme, employees can sacrifice their salary in exchange for a bike or related gear.

For these specific benefits, salary sacrifice can lower both employer and employee NIC, which is especially beneficial given the upcoming rise in rates.

Important Cautions

A salary sacrifice arrangement only works if the employment contract is properly updated to show the lower cash salary. The employee can’t just jump back to the higher salary any time they want, or HMRC may decide the sacrifice wasn’t valid. Also, reducing an employee’s cash pay might affect other factors—like mortgage approvals or statutory payments (maternity or sick pay)—because these often depend on their official salary.

A Word from Tax Accountant: How We Can Help

If you’re looking to manage the upcoming NIC increase proactively, Tax Accountant can guide you in setting up a salary sacrifice arrangement that fits your situation. We’ll help you:

1. Identify which benefits (like pensions or cycle-to-work) qualify for continued NIC savings.
2. Restructure pay packages to ensure compliance with HMRC rules.
3. Calculate the potential savings so you’ll see the exact benefits of making the switch.

With smart planning, you and your employees can keep more of your hard-earned money. Ready to explore your options? Reach out to Tax Accountant today, and let’s create a powerful strategy that beats the upcoming NIC rise.

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