Silver lining for employees as firms could adopt salary sacrifice pension arrangements to offset cost of Budget’s employer National Insurance hike

Chancellor Rachel Reeves’ biggest single tax hike among the £40billion in yesterday’s Budget is the big rise in employer National Insurance Contributions due next April.  

The rate will increase from 13.8% to 15.0%, while the earnings threshold at which it kicks in will be slashed from £9,100 to £5,000 from 6 April 2025, raising about £25.5billion a year by the end of the OBR forecast period. Small businesses will get some protection, as the Employment Allowance is going up from £5,000 to £10,500 and removing the £100,000 threshold, which means that 865,000 employers will pay no NICs next year, according to the Treasury.  

Gary Smith, Partner in Financial Planning and retirement specialist at leading wealth management firm Evelyn Partners says: ‘This NIC rise is a very significant cost to employers that is likely to have a knock-on effect on hiring and remuneration plans, and could hit job creation and real wage increases.[1] However, there might be a silver lining for some employees in that the employer NI increase will make pension schemes operating on a salary sacrifice basis more attractive to employers – which could mean more employees end up benefitting from them.  

‘The Chancellor slightly disingenuously implied her decision not to freeze income tax thresholds further than the current 2028 was something of a rabbit out of the hat. In reality, that was only something floated in the media a couple of weeks ago - income tax thresholds are still frozen and we can only expect meagre increases when that freeze thaws. 

‘But salary sacrifice pension contributions could help some employees avoid big steps in marginal rates of taxation that occur in the UK salary ladder, for instance by avoiding stepping into the 40% higher rate of taxation at £50,270, or the removal of the personal allowance that starts at £100,000 and can result in a 60-62% marginal tax rate.’ 

Smith explains: 'Employers will be looking to reduce costs and as part of this will review their benefit offering to ensure that they are getting value-for-money. Notably, an opportunity may arise for employers to offset some of this cost through the use of a salary sacrifice pension scheme, including bonus sacrifice, where that’s not already in place.’  

Salary sacrifice (also known as salary exchange) is a formal arrangement between an employer and an employee whereby an employee gives up part of their salary in exchange for non-cash benefits – which can include waiving some bonus entitlement in favour of a pension contribution. The benefits are not subject to income tax or NICs, so their taxable salary is reduced. Pension contributions via salary sacrifice pensions are a tax-efficient way for employees to pay into a pension scheme and also an attractive option or employers to reduce their NI costs.  

Smith continues: ‘Salary sacrifice can be a “win win” option for both employees and employers, helping employees increase their take-home pay and help employers lower their NICs. However, despite the financial benefits to both the employer and employee, many organisations still do not operate a salary sacrifice arrangement. These employers could look towards salary sacrifice pension schemes to reduce costs. 

‘Say that the employer currently has a workplace pension scheme set up that is not written on a salary sacrifice basis. The employer would currently pay NI on the full salary of each employee above the lower threshold. Let’s say the wage bill was £1m above the lower level, this would make the employer NI bill currently £138,000, now increasing to £150,000 when the NI rate goes up to 15%.  

‘On a normal workplace pension scheme the employees would pay 5% of salary into the pension, which would be £50k in this example. If the employer converted the scheme to salary sacrifice, this would reduce the wage bill to £950,000 and the NI would reduce to £142,500, a saving to the employer of £7,500.’  

NOTES 

[1] Evelyn Partners’ calculations show that an employer with an annual wage bill of £5million across 100 employees would currently have an employer NIC liability of approximately £564,000. From April 2025, employer NIC costs in this example will rise to approximately £664,500 – an increase of nearly 18 per cent.