With the increase in employers’ national insurance contributions (NICs) set to take effect in April 2025, salary sacrifice is becoming an increasingly cost-effective option for businesses. However, deciding whether to implement a salary sacrifice scheme isn’t always straightforward, as there are key considerations for both employers and employees.
This blog explains how salary sacrifice works, its benefits, and potential implications, helping you determine whether it’s the right choice for your business.
What Is Salary Sacrifice?
Salary sacrifice is an agreement between an employer and an employee where the employee agrees to reduce their salary in exchange for a non-cash benefit. The most common uses of salary sacrifice include employer pension contributions and company car schemes.
For employees enrolled in workplace pensions under auto-enrolment, it’s important to ensure that the minimum pension contribution levels are still met. Salary sacrifice arrangements must be formalised in an employee’s contract and structured correctly to comply with HMRC guidelines.
Importantly, salary sacrifice cannot reduce an employee’s salary below the minimum wage, meaning lower-paid employees are not eligible for this scheme.
Benefits for Employers
Salary sacrifice reduces the taxable pay of employees, leading to lower employer national insurance contributions (NICs). With NICs set to rise from 13.8% to 15% in April 2025, and the threshold for payments decreasing from £9,100 to £5,000 per year, this scheme presents an opportunity for businesses to cut costs significantly.
Implications for Employees
Salary sacrifice affects an employee’s financial position in several ways:
Take-Home Pay Impact
- A lower salary results in reduced income tax and NICs, increasing the employee’s net take-home pay slightly.
- For pension contributions, employees typically contribute 4%, with the government adding 1%. Under salary sacrifice, the full 5% contribution is made, slightly reducing the take-home pay benefit.
- If the 5% contribution isn’t met via salary sacrifice, the employer must make up the missing 1% to meet the minimum 8% auto-enrolment contribution.
Potential Disadvantages
- Mortgage and Loan Applications: A lower salary may affect mortgage approvals or rental applications, as lenders often assess affordability based on gross earnings.
- State Benefits: Salary sacrifice can reduce eligibility for state benefits such as statutory sick pay (SSP) and redundancy pay.
- National Insurance Contributions: Employees earning close to the lower earnings threshold may find their NIC payments drop below the qualifying level, potentially affecting state pension entitlement.
Example: How Salary Sacrifice Impacts Pay
John earns £30,000 and participates in auto-enrolment. Here’s how salary sacrifice would affect his earnings:
| Relief at Source | Salary Sacrifice | Difference | |
| Salary | £30,000 | £28,812 | -£1,188 |
| Pension Contribution | £1,188 | £1,188 | 0 |
| Tax & NICs | £4,880 | £4,548 | -£332 |
| Take-Home Pay | £24,169 | £24,264 | +£95 |
| Employer NICs (@15%) | £3,749 | £3,571 | -£178 |
Should Your Business Offer Salary Sacrifice?
The decision to implement a salary sacrifice scheme depends on your business objectives and employees’ preferences. Some employees may be hesitant if the savings for them are minimal compared to the financial implications of a reduced salary.
To encourage participation, employers sometimes share the NIC savings with employees, either by increasing pension contributions or offering additional benefits such as death-in-service cover.
Key Considerations Before Implementing Salary Sacrifice
- Employees must opt in voluntarily, and the full implications should be explained clearly.
- If only some employees participate, employers must manage multiple pension contribution structures, adding to administrative complexity.
- Salary sacrifice arrangements must be documented correctly to comply with HMRC regulations.
Salary sacrifice can be an effective way for businesses to reduce employer NICs while providing employees with additional financial benefits. However, it’s important to weigh the cost savings against administrative complexity and potential drawbacks for employees.
By carefully considering your workforce’s needs and offering clear guidance, you can determine whether salary sacrifice is a suitable option for your business. If you’re unsure, consulting a financial advisor or payroll specialist can help ensure compliance and maximise the benefits of this arrangement.
Thinking of implementing a salary sacrifice scheme? Contact us today for tailored advice on how it could work for your business. Don’t forget to follow us on LinkedIn & Instagram for daily business news and tips!Â
