How Salary Exchange can help businesses manage NI costs
19th November 2024
Following the 2024 Autumn Budget, the government announced a 1.2% increase in National Insurance Contributions (NIC) for employers, set to take effect from April 2025. This adjustment will increase the employer NIC rate to 15% with other changes, adding a new cost consideration for businesses.
Changes to Employer National Insurance Contributions
From April 2025, the following updates to employer NICs will be implemented:
- Increase in Employer NIC Rate: The employer NIC rate will rise by 1.2 percentage points, going from 13.8% to 15%. This means that employers will now contribute 15p in NIC for every £1 paid in salary to employees.
- Reduction in the Secondary Threshold: Employers will now start paying NICs on earnings above £5,000 per year, a decrease from the current threshold of £9,100. This change will increase the NIC liability for many employers.
- Boost in Employment Allowance: To support smaller businesses, the Employment Allowance will increase from £5,000 to £10,500 per year. This allowance provides some relief by offsetting the NIC liability up to the new threshold.
These measures are designed to increase government revenue and bolster public finances. However, they present new challenges for businesses, especially smaller companies and those with tight profit margins.
Managing Increased Costs with Salary Exchange
Given the added financial pressures, many businesses may wish to explore cost-saving behaviours, such as salary exchange.
Salary exchange (or salary sacrifice) is an arrangement where employees agree to reduce their gross pay in exchange for contributions made directly into their workplace pension scheme. It’s effective for auto-enrolment pension schemes, including master trusts and group personal pension plans, and allows for significant savings on both sides.
How Salary Exchange Works
The concept is simple: instead of employees contributing to their pensions after receiving their gross salary and incurring NICs, they agree to a reduction in their gross salary by the same amount they would have contributed. The employer then pays this reduced salary along with the pension contribution directly to the pension scheme. This structure allows both employers and employees to avoid NICs on the pension contribution amount, creating savings on both sides.
For example, if an employee on a £30,000 salary opts to sacrifice 5% of their salary, the tax/NIC savings can be substantial.
Sample Savings Based on Average Salary of £30,000
| Number of employees | Potential annual savings |
| 20 employees | £3,564 – £4,500 |
| 50 employees | £8,910 – £11,250 |
| 100 employees | £17,820 – £22,500 |
Discover Your Savings Potential
There are some rules that need to be followed but if you’re interested in learning more about how salary exchange can benefit your business, we offer a feasibility study to assess the estimated savings available. This service can help you make an informed decision about whether salary exchange is right for your organisation and your employees.