With the approaching increase in employer’s National Insurance (NI) rates, coupled with the reduction in the lower threshold at which NI applies, UK employers are preparing themselves for increased costs from April 2025 – but there may be opportunities too.
Steve Leigh, associate partner at Aon, said: “Pensions salary sacrifice is a well-trodden path for most employers as it allows them and their employees to save NI on the amount of the employee pension contribution. However, not all salary sacrifice arrangements are set up to maximise the savings available. Aon’s 2024 DC Pension Scheme Survey showed that one in 10 employers are still not using pensions salary sacrifice. This is often the case where there is an overseas parent company that is less familiar with UK pension and tax rules. There are also companies who simply haven’t considered it. In these situations, introducing salary sacrifice could make a huge difference and could offset most of the forthcoming NI cost increases.”
However, even for employers that already have salary sacrifice in place, there may be opportunities to increase the savings available:
Applying salary sacrifice to additional contributions – Some schemes were set up for core employee contributions only, with any additional top-ups falling outside of salary sacrifice. This may have been done to avoid any risk of high contribution levels taking employee salaries below the National Living/Minimum Wage, but improvements in payroll automation mean this can often be managed on a month-by-month basis.
Bonus sacrifice – Aon’s 2024 DC Pension Scheme Survey found that four in 10 employers do not offer employees the opportunity to sacrifice some or all of a bonus into their pension. While this requires careful communication to employees, it has the potential to deliver significant cost savings.
Using payroll automation – Historically, participation in salary sacrifice schemes was restricted to employees above a minimum salary level. This ensured that the employer did not breach minimum wage levels, and that the employee did not lose out on any salary-related state benefits. For employers with a large number of lower earning roles, this could mean many employees were excluded. However, as long as the contractual wording is set up correctly, modern payroll systems can check and switch people in and out of salary sacrifice on a monthly basis. This can result in more employees being able to participate in salary sacrifice.
Redundancy sacrifice – The first £30,000 of a redundancy payment is usually tax free, but employees being made redundant may benefit from the option to sacrifice amounts above this level into their pension, particularly when they are nearer to retirement age.
Steve Leigh continued: “It is important to remember that there are also risks associated with not operating salary sacrifice correctly. Even if an employer is already making use of all the potential savings set out above, we recommend they review their arrangement prior to the April NI and minimum wage changes. “Where a salary sacrifice arrangement is not set up correctly and employees have been underpaid the minimum wage, the arrears that are repaid to the employee must take account of the length of time that has elapsed since the underpayment. If the salary sacrifice arrangement itself is not valid, then employers could face a sizable tax bill on top of the NI increases.”
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