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Salary sacrifice to beat employer's NIC rise

Using salary sacrifice to beat the rise in employer’s NIC

One of the more unpopular Budget announcements was the rise in employer’s National Insurance from 13.8% to 15% from 6 April 2025. The Class 1A rate and Class 1B rate are similarly increased, meaning that it will hit employers on the provision of both cash pay and taxable benefits. It will also make it more expensive for employers to settle an employee’s tax liability through a PAYE Settlement Agreement; Class 1B contributions apply on both the items included in the agreement in place of the Class 1 or 1A liability that would otherwise arise, and also on the tax due under the agreement.

Consider a salary sacrifice arrangement

The introduction of the alternative valuation rules from 6 April 2017 stripped away the advantages of using a salary sacrifice arrangement for all but a handful of benefits. However, for those benefits which remain outside the alternative valuation rules, including pension savings, the use of a salary sacrifice arrangement provides the opportunity for National Insurance savings for both the employer and the employee.

Assume an employee wishes to top up their pension by making additional contributions of £500 a month. While pension contributions attract tax relief, there is no equivalent relief for National Insurance, so National Insurance must be calculated on gross pay before the deduction of those contributions. For the employee, this will mean a National Insurance hit of £40 a month where those earnings fall between the primary threshold and the upper earnings limit, and £10 if they fall above the upper earnings limit. For the employer, the hit is £69 a month for 2024/25, rising to £75 a month for 2025/26.

If instead the employee enters into a salary sacrifice arrangement with their employer to give up £500 of their cash salary each month in return for the employer making a contribution of £500 into their pension scheme, the employee’s gross pay will fall by £500 a month, saving them between £10 and £40 a month in employee contributions. The employer will save employer contributions, which for 2025/26 on £500 a month equates to an annual saving of £900. The employee’s pension still receives a contribution of £500 a month, but both the employee and the employer save National Insurance contributions in the process.

A salary sacrifice arrangement can also be used to similar effect to provide tax-free benefits that fall outside the alternative valuation rules, such as employer-provided cycles and cycling safety equipment.

25/02/2025