Increases to National Insurance Contributions have been described as a ‘gut punch’ by employers, but salary exchange or sacrifice schemes might turn out to be a silver lining for businesses and employees alike.
New Chancellor Rachel Reeves promised that her Autumn 2024 Budget was focused on growing the UK economy. However, for many companies, the changes to National Insurance Contributions (NICs) were far from their idea of a growth charter.
What’s changing?
From 6 April 2025, the rate of employer NICs will rise by 1.2 percentage points, from 13.8% to 15%. The Chancellor also announced that from April 2025 the earnings threshold at which employers begin paying NICs will shrink from £9,100 to just £5,000 per year. From the government’s perspective, these changes are expected to generate an additional £25bn in annual tax revenue. However, they are also likely to mean increased payroll expenses for a greater number of businesses across the UK, including small and medium-sized companies that were previously below the NIC earnings threshold.
What is the likely effect?
Let’s start with the initial financial costs.According to independent consultancy Barnett Waddingham, a business paying an employee an average annual salary of £35,000 will have to pay an additional £925 in employer NICs from next year. For an employee on a £60,000 salary, the extra NIC amount is £1,225, and it increases to an additional £1,705 for an employee on a £100,000 salary. These amounts will start adding up quickly for companies with larger workforces.
Aside from higher payroll costs, higher NIC payments are likely to change business behaviour. Companies may choose to scale back salary increases or postpone hiring plans, which goes against the government’s mission for growth. The changes are also likely to disproportionately affect sectors that rely heavily on part-time workers, such as retail and hospitality. Staff could be asked to cut back on their hours, resulting in greater hardship for employees. Alex Baldock, Chief Executive of retailer Currys, called the measures “a tax on jobs,” adding that the more the tax burden is added to, “the worse it is for shops, jobs, prices and growth.”
What can businesses (and employees) do to ease the NIC burden?
Salary sacrifice (or salary exchange) could prove to be an effective strategy for both employers and employees. With a salary sacrifice arrangement, employees agree to reduce their gross salary in exchange for non-cash benefits (which can include pension contributions, cycle-to-work or electric vehicle leasing schemes, or childcare vouchers).
Paying a reduced gross salary results in lower NICs both for the employer and the employee, as NICs are calculated on the employee’s adjusted (lower) gross salary. Given the increased rate of NICs announced in the Budget, agreeing lower gross salaries could result in valuable cost savings, which could then be used to help lower operational costs or to reinvest in growing the business. From the employer’s perspective, offering salary sacrifice schemes as part of a competitive benefits package is also a great way to help recruit and retain talent.
Salary sacrifice is also a win-win for employees. Depending on how much salary is exchanged and the benefits provided, employees may see their net income increase compared to receiving an equivalent increase in gross salary. Employees exchange a portion of their salary for pension contributions, this not only reduces NICs but also gives them a highly valuable long-term financial benefit. As a result, and given the potential savings in NICs per employee, company pension schemes operating on a salary sacrifice basis are likely to become more popular with employers.
Talk to S4 Financial
Whether you’re an employee or you run your own business, it’s worth understanding the impact that changes to NICs could have on your personal situation. As your financial advisers, we can help you understand the tax implications of the Budget, and we can help you review and adjust your existing financial arrangements to take advantage of the new circumstances.
It is important to take professional advice before making any decision relating to your personal and business finances. Information within this document is based on our current understanding of the Budget, taxation and HMRC rules and can be subject to change in future. It does not provide individual tailored investment advice and is for guidance only. Some rules may vary in different parts of the UK; please ask for details. We cannot assume legal liability for any errors or omissions it might contain. Levels and bases of, and reliefs from taxation are those currently applying or proposed and are subject to change; their value depends on the individual circumstances of the investor.